SEC proposes auditor independence, workpaper retention rules

WASHINGTON, Nov. 20, 2002 — The Securities and Exchange Commission has proposed rules that would require auditors to retain specific types of records. A second set of rules would require certain disclosures and reports by auditors and set conditions under which auditing firms would not be considered independent for purposes of performing audits of public company financial statements.

These rules are required under the Sarbanes-Oxley Act of 2002.

The proposed record-retention rules, which are required to implement Section 802 of the Sarbanes-Oxley Act, would specify the information that must be retained by auditors for a five-year period subsequent to the completion of an audit or review of a registrant's financial statements. In particular, the proposed rules would specify that auditors should retain workpapers and other documents that form the basis of the audit or review and memoranda, correspondence, communications, other documents and records (including electronic records) which are created, sent or received in connection with the audit or review and contain conclusions, opinions, analyses or financial data related to the audit or review.

The SEC also has proposed rules to enhance the independence of accountants who audit and review financial statements and prepare attestation reports filed with the SEC. As directed by Section 208(a) of the Sarbanes-Oxley Act of 2002, the SEC is proposing rules to:

revise its regulations related to the non-audit services that, if provided to an audit client, would impair an accounting firm's independence (based on the nine prohibited services listed in Sarbanes-Oxley);
require that an issuer's audit committee pre-approve all audit and non-audit services provided to the issuer by the auditor of an issuer's financial statements;
prohibit partners on the audit engagement team from providing audit services to the issuer for more than five consecutive years and from returning to audit services with the same issuer within five years;
prohibit an accounting firm from auditing an audit client's financial statements if certain members of management of that client had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures;
require that the auditor of an issuer's financial statements report certain matters to the issuer's audit committee, including "critical" accounting policies used by the issuer; and
require disclosures to investors of information related to the audit and non-audit services provided by, and fees paid by the issuer to, the auditor of the issuer's financial statements. The disclosures, to be made in issuers' annual reports, would include fees paid by issuers for audits, tax preparation and all other fees. The proposal would require disclosure of fees for the year covered by the filing and for the previous year.

In addition, under the proposed rules, an accountant would not be independent from an audit client if any partner, principal or shareholder of the accounting firm who is a member of the engagement team received compensation based directly on any service provided or sold to that client other than audit, review and attest services.

The Sarbanes-Oxley Act requires that final rules be in place by Jan. 26, 2003. Comments on the proposal should be received by the SEC within 30 days of publication in the Federal Register.

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