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Auditor Independence Rules Are Proposed

The SEC has proposed new rules to protect auditor independence that will place new responsibilities on mutual fund companies.

The rule proposal, if adopted, would require fund companies to disclose the types of services provided by their auditors and the fees charged for them if fees exceeded $50,000 or 10 percent of the fund's total audit fees. Also, the fund's board of directors would have to issue a statement on each service the accounting firm provided and whether an auditor's independence may have been compromised in providing that service.

If an accounting fee makes up over 50 percent of a fund's audit expenses, the SEC would require the fund to disclose the percentage of hours worked on the audit by people not directly employed by the accounting firm. That provision is designed to flag situations in which accounting firms allow employees to become full or part-time employees of fund companies and then "lease" them out to work on other audits, according to the proposal.

"An accountant is not independent when the accountant has a mutual or conflicting interest with the audit client, audits his or her own work, functions as management or an employee of the audit client or acts as an advocate for the audit client," said Arthur Levitt, chairman of the SEC. "There may be some in the profession who will support the general direction of today's release. There will be some who won't."

The rule proposal is designed to address the consolidation and evolution of the accounting services industry and conflicts of interests that may have developed as a result of those changes, said Levitt.

Early last month, the Big 5 accounting firms agreed to report past infractions of independence rules in exchange for immunity from SEC action, Levitt said. The firms are also setting up systems that will help prevent future independence violations, he said.

PricewaterhouseCoopers of New York issued a statement last week in support of the SEC's rule proposal.

"At this crucial moment in the history of the accounting profession, the public interest must take precedence over self-interest," the statement said.

Earlier this year, the SEC released a report that outlined widespread violations of existing independence rules by the Big 5 accounting firms. The report recommended measures that would foster compliance with independence rules and bring to light any violations.

The Investment Company Institute will review the proposal and issue a statement on it at the end of the 75-day comment period, said John Collins, an ICI spokesperson. The relationship independent auditors have with fund companies is vital to the protection of investors' interests and is of great interest to the ICI, he said.