To guard against conflicts of interest, corporate directors must approve each tax and consulting project proposed by outside auditors before they are hired for the additional work, according to Securities and Exchange Commission guidelines issued yesterday.
The SEC released a question-and-answer sheet for auditors and board members after receiving complaints that big accounting firms were flouting new rules designed to ensure independent reviews of financial statements.
The accounting industry's reputation has been tarnished in recent years by scandals at Enron Corp. and WorldCom Inc., and accountants are undergoing unprecedented scrutiny from investors and regulators.
Yesterday's SEC memo emphasized that corporate audit committees are required to scrutinize or approve all the key details before hiring auditors to do additional consulting and tax work.
A brochure distributed to clients by accounting giant Ernst & Young LLP earlier this year said board members could generally sign off on broad categories of work by outside auditors once a year rather than immersing themselves in the details every time.
The Consumer Federation of America, Consumers Union and others wrote to the SEC in June that major audit firms "have engaged in practices that entail massive conflicts of interest, and they have fought vehemently to preserve that business model when it has come under attack by regulators and Congress."
An Ernst spokesman said yesterday that the firm welcomed the new guidance and that "it should be helpful with understanding and complying with these new regulations."
"On things like preapproval, there should be no fooling around," SEC member Harvey J. Goldschmid said in an interview.
Accounting professors and partners at the Big Four accounting firms said board members will not be eager to go through layers of red tape to hire the same firm to do audits, tax and consulting, so one effect of the new guidance could be to spread out work among accounting firms.
For example, Dennis Beresford, an accounting professor at the University of Georgia and chairman of the audit committee at WorldCom Inc., said managers at the company must fill out a form to use their audit firm, KPMG LLP, to provide extra services. The form seeks information about why KPMG must be used and whether the project meets independence rules. Beresford and the company's chief financial officer must sign off before the auditors are hired.
"I guess they're hoping the situation will police itself," Beresford said. "Maybe it's an indirect way of making sure companies won't engage their auditors to do those kinds of things."
The agency guidelines did not address another major question raised by consumer groups: Should auditors be able to perform tax-planning work for clients? That service brings in billions of dollars a year to the nation's biggest accounting firms. But some members of the new Public Company Accounting Oversight Board, created last year to clean up the accounting industry, have said the board may eventually consider whether firms should market tax shelters to clients and prepare personal tax returns for executives who lead companies that the firms audit.
The SEC released a question-and-answer sheet for auditors and board members after receiving complaints that big accounting firms were flouting new rules designed to ensure independent reviews of financial statements.
The accounting industry's reputation has been tarnished in recent years by scandals at Enron Corp. and WorldCom Inc., and accountants are undergoing unprecedented scrutiny from investors and regulators.
Yesterday's SEC memo emphasized that corporate audit committees are required to scrutinize or approve all the key details before hiring auditors to do additional consulting and tax work.
A brochure distributed to clients by accounting giant Ernst & Young LLP earlier this year said board members could generally sign off on broad categories of work by outside auditors once a year rather than immersing themselves in the details every time.
The Consumer Federation of America, Consumers Union and others wrote to the SEC in June that major audit firms "have engaged in practices that entail massive conflicts of interest, and they have fought vehemently to preserve that business model when it has come under attack by regulators and Congress."
An Ernst spokesman said yesterday that the firm welcomed the new guidance and that "it should be helpful with understanding and complying with these new regulations."
"On things like preapproval, there should be no fooling around," SEC member Harvey J. Goldschmid said in an interview.
Accounting professors and partners at the Big Four accounting firms said board members will not be eager to go through layers of red tape to hire the same firm to do audits, tax and consulting, so one effect of the new guidance could be to spread out work among accounting firms.
For example, Dennis Beresford, an accounting professor at the University of Georgia and chairman of the audit committee at WorldCom Inc., said managers at the company must fill out a form to use their audit firm, KPMG LLP, to provide extra services. The form seeks information about why KPMG must be used and whether the project meets independence rules. Beresford and the company's chief financial officer must sign off before the auditors are hired.
"I guess they're hoping the situation will police itself," Beresford said. "Maybe it's an indirect way of making sure companies won't engage their auditors to do those kinds of things."
The agency guidelines did not address another major question raised by consumer groups: Should auditors be able to perform tax-planning work for clients? That service brings in billions of dollars a year to the nation's biggest accounting firms. But some members of the new Public Company Accounting Oversight Board, created last year to clean up the accounting industry, have said the board may eventually consider whether firms should market tax shelters to clients and prepare personal tax returns for executives who lead companies that the firms audit.
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