The Big Five's Chance At Self Regulation

The Securities & Exchange Commission and the accounting profession have come to a reasonable compromise over a serious conflict of interest issue involving the sale of consulting services to companies that the Big Five auditn. Those accounting firms that sign on to the agreement are to be congratulated for recognizing the magnitude of the problem and for seeking a solution.

SEC Chairman Arthur Levitt originally proposed banning accountants from selling lucrative information-technology consulting services to their audit clients. Levitt argued that if the accountants were business partners with the companies they audit, it would be extremely difficult to be objective. Under the compromise, the accounting firms will be able to design and sell computer systems, but it will be up to the client audit committee to disclose to shareholders in the company's annual proxy how much it paid to the accountants for the services. The audit committee must also verify whether or not the consulting services have impaired the auditors' independence in any way. Finally, the corporation, and not the auditor, must own the information systems installed.

This is the accounting profession's big chance for self-regulation in the high-tech arena. If they, or their clients, break this agreement, then a ban will almost certainly follow.

Before it's here, it's on the Bloomberg Terminal.