|
January 18, 2002
SEC Clarifies Position on Auditor Independence Resolutions
by William Baue
Although the SEC rejected a shareowner resolution early in 2001 that called for shareowners to
choose a company’s auditor, the SEC recognizes the relevance of the auditor independence
issue to shareowners.
SocialFunds.com --
The U.S. Securities and Exchange Commission (SEC) has
indicated in the past that shareowners overstep their bounds when they file proposals asking to
choose a company’s auditor. Now that legal action looms over Chicago-based Arthur Andersen,
the big-five accounting firm that performed questionable auditing and consulting services for
Enron, the SEC may need to revisit the idea that shareowners have a legitimate right to choose an
independent auditor. The implosion of Enron brings into question management’s ability to
choose an auditor who is truly independent.
Mark Latham, founder of the Corporate Monitoring Project in San Francisco, brought the issue
of auditor independence to the SEC's attention some 13 months before the Enron debacle. Dr. Latham
suggested that auditors should be hired by shareowner vote, thus preventing the potential conflict
of interest inherent when management hires the very people who assess the company's performance.
"This would encourage auditors to build their reputations in the eyes of investors rather
than in the eyes of management, creating new pressure for higher standards," wrote Dr. Latham in
the memo filed with the SEC on November 2, 2000.
Dr. Latham filed a shareowner resolution
with electronics manufacturer SONICblue (ticker: SBLU) proposing this very system of auditor
selection. In January 2001, SONICblue responded by informing the SEC of its intention to omit the
resolution from its proxy for several reasons. The most basic reason argued that auditor selection
amounted to "ordinary business operations," and therefore management, not shareowners, should make
that decision.
In February 2001, Dr. Latham answered this argument by pointing to the
SEC's own publication, Revision of the Commission's Auditor Independence Requirements,
released on November 21, 2000. The revised rules highlighted the importance of auditors serving
the interests of investors.
"The commission has clearly determined that auditor selection
should not just be left to management," Dr. Latham concluded.
Despite this input, the SEC
informed SONICblue on March 23, 2001 of its decision to uphold the company's decision to omit the
resolution on the grounds of the "ordinary business" argument alone.
The SEC has taken a
different stance regarding resolutions that call on management to choose an auditor who is truly
independent. The United Association of Journeymen and Apprentices of the Plumbing, Pipefitting and
Sprinkler Fitting Industry pension funds recently filed a shareowner resolution with Walt Disney
(DIS) calling for auditor independence. Walt Disney claimed "ordinary business" in its appeal to
the SEC to omit the resolution from its proxy.
This time, the SEC sided with the
shareowner proposal. However obliquely, the SEC referred to Enron in its decision: "In view of
the widespread public debate concerning the impact of non-audit services on auditor independence
and the increasing recognition that this issue raises significant policy issues, we do not believe
that Disney may omit the proposal form its proxy materials in reliance on [the 'ordinary business']
rule . . ."
Unsurprisingly, a number of other auditor independence resolutions have since
been filed for 2002 company annual meetings. Through its pension funds, the United Brotherhood of
Carpenters and Joiners of America filed auditor independence proposals with 12 companies, including
Apple Computer (AAPL), Avon Products (AVP), and Bristol-Meyer Squibb (BMY).
©
SRI World Group, Inc. All Rights Reserved.
Top
| 
