Last June, when Arthur Levitt Jr. proposed strict limits on auditors who also consult for their clients, accounting firms screamed. One of their complaints: The Securities & Exchange Commission chairman was overriding hard-won reforms to beef up corporations' audit committees. Levitt had insisted that those panels of independent directors should be investors' first line of defense against financial shenanigans. So why, the accountants asked, didn't he rely on them to police conflicts that arise when auditors also bid to install computer systems for a client?
Message to the Big Five: Be careful what you wish for. The final rules approved by the SEC on Nov. 15, with the 11th-hour acquiescence of four of the Big Five firms, appear far weaker than the ban on mixing auditing and consulting that Levitt originally sought. But by putting the burden on corporate audit committees--which now must tell shareholders how they decided that hiring the same firm to do auditing and consulting won't compromise the auditors' objectivity--the SEC chief may get the same result in the end.
EXTRA HURDLE. Long after Levitt's departure, expected early next year, the accountants will face unrelenting pressure to prove their independence--or get out of consulting. Many at the SEC believe the new rule will sharply limit the non-bean-counting work that the Big Five can do. Audit committee members will give such proposals "a long and hard look," says a top official. So instead of having the inside track on lucrative consulting jobs, a company's auditors will now face an extra hurdle.
Is that fair? Yes. Corporate boards are the right place to balance investors' interests in unbiased financial statements against the Big Five's need to develop their businesses. The accountants get what they say they need most: They can continue to consult on information technology, the most lucrative of their services and the key to building the expertise needed to audit New Economy companies.
For all its advantages, the deal almost didn't happen. On the evening of Nov. 13--just 40 hours before the SEC was to vote on the new rules--Levitt and his negotiators met in the SEC's Washington office with the CEOs of Arthur Andersen and Deloitte & Touche, two of the three firms battling the SEC. The heads of KPMG and the American Institute of Certified Public Accountants were on speakerphone.
After nearly two hours of discussion, the Big Five executives retired to a nearby room for a 45-minute caucus. When they returned, they told Levitt they couldn't accept his deal. Around 8:15 p.m., eager to catch the last shuttle back to New York, the executives left. "Here's my home phone number," Levitt told them. "Call me if you change your minds." No one did.
The next morning, though, Joseph F. Berardino, head of Andersen's auditing practice, picked up the phone. Without a deal, he and his colleagues knew, the SEC would impose its original plan to ban auditors from installing IT systems for clients. And the political climate had changed. The three firms had fought to delay any SEC action until next year, when a GOP Congress, perhaps with President Bush, could force the SEC to back down. But GOP losses on Nov. 7 and the ambiguous Presidential outcome made that strategy dicey.
After six furious hours of phone calls, the deal was done. Andersen, Deloitte, and the AICPA joined PricewaterhouseCoopers and Ernst & Young--which had both backed the SEC from the start--in accepting the new rules. KPMG withheld its support: "Nobody's signing until we see all the language," says Stephen E. Allis, head of KPMG's Washington office.
The deal ends one of the nastiest regulatory fights Washington has seen in years. It won't end the decades-old battle over how to ensure that auditors remain unbiased guardians of investors' interests. But, in his parting shot, Levitt has won much of what he wanted all along.