SEC acts to deter fraud at firms
By Carrie Johnson
Washington Post
WASHINGTON — The Securities and Exchange Commission yesterday unanimously approved rules that will force executives at public companies to review safeguards for detecting financial fraud, a move that regulators said could help deter wrongdoers and stamp out major accounting abuses.
Faulty internal controls have played a role in a string of accounting scandals, including those at Rite Aid Corp. and WorldCom Inc. The new rules were mandated by last year's Sarbanes-Oxley Act.
Regulators voted 5-0 to require corporate managers to attest to the adequacy of internal controls — checks and balances designed to catch mistakes in and tampering with financial records — and to endorse those conclusions in their annual financial reports. Accounting firms would also be required to review management's claims as part of their audits.
Commissioners acknowledged that the new rules will create significant burdens for publicly traded companies.
A recent informal survey conducted by Financial Executives International Inc. of 83 member companies suggested that the nation's largest firms will have to devote as many as 6,000 hours to the effort on average. SEC officials said that figure should decrease as the process grows routine.
Because of those corporate concerns, the SEC agreed to give companies more time to put the internal controls in place. The new rules will apply to large publicly traded U.S. firms as of June 2004 and to smaller U.S. companies and foreign firms in April 2005.
Commissioner Paul Atkins said the agency should carefully monitor how firms cope with the rules to ensure they are not too costly and burdensome. "Are investors better protected because of the actions we have taken, or are we just fattening the pockets of accounting firms and law firms?" Atkins asked.
As part of their annual review, auditors will have to determine whether the fraud detection systems used by their clients are adequate.
The new Public Company Accounting Oversight Board will decide how detailed that evaluation must be. It has scheduled a public roundtable on internal controls in the fall.
Accounting firms are gearing up for the extra work. Charles Mulford, an accounting professor at Georgia Tech, said accountants have an interest in performing a painstaking review of controls because they could ultimately be held legally liable for breakdowns.
The Big Four accounting firms and a number of technology companies are marketing software to help clients track and evaluate their internal controls. SEC deputy chief accountant Scott Taub said such moves could raise questions about auditors' independence if accounting firms are helping to set up the systems they later evaluate. "Companies and their auditors need to be mindful" of those problems, Taub said.
