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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.
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