(November 15) – “The Securities and Exchange Commission reached an agreement yesterday with four leading accounting firms on a new rule regarding independence that will substantially reduce the amount of consulting work that the firms can do for their auditing clients,” writes Floyd Norris in today’s New York Times.

“The deal on a new rule, to be adopted today by the S.E.C., came after long negotiations that broke down on Monday night and were then renewed yesterday morning, according to senior S.E.C. officials.”

“The agreement on the highly contentious issue appears to reduce the chances that the new rule — likely to be the last major initiative approved by the S.E.C. before Arthur Levitt leaves as chairman next year — will be overturned either by Congress or a new S.E.C. Three big accounting firms, including two that signed on to the deal yesterday, had been lobbying with Congress to try to block any action by the commission.”

“Companies whose securities are publicly traded have long been required to have their financial statement certified by an independent auditor. But as the big accounting firms have grown to the point that auditing services provide a minority of their revenue, some officials and critics have expressed fear that auditors might not be truly independent from big clients that paid them more in consulting fees than they paid for their corporate auditing. The S.E.C. was also concerned that auditors might hesitate to criticize a company’s information technology systems if the systems were designed largely by the auditing firm’s consultants.”

“It is unclear just how much business the auditing firms will lose, particularly because business given up by one leading firm might well go to another. But a requirement for increased disclosure, as well as new limitations on the nature of the consulting work they can do, is likely to mean that some companies will choose to shift nonaccounting work from their auditing firm to a competitor.”

“While Mr. Levitt is achieving fewer restrictions than he sought, the agreement is nonetheless a significant victory for him. The issue has been around for decades, but the S.E.C. had not acted on it since the early 1980’s, when the commission appointed by President Ronald Reagan repealed disclosure rules adopted by the commission during the administration of President Jimmy Carter. Mr. Levitt took the initiative in raising the issue in recent years and pushed for a rule despite sustained political opposition.”

“The firms that indicated they would support the rule expected to be adopted today are PricewaterhouseCoopers, Ernst & Young, Arthur Andersen and Deloitte & Touche, according to the S.E.C. officials. The first two had been pushing for a compromise somewhat similar to what was adopted, although it would have required less disclosure.”