Friday, December 17, 2004

Auditors: The Leash Gets Shorter

For years, Sun Microsystems Inc. (SUNW ) looked to its auditor, Ernst & Young International, to provide all manner of advice on other financial matters. But recently the Santa Clara (Calif.) high-tech company has started to shop elsewhere. PricewaterhouseCoopers now handles Sun's internal audit, KPMG International helps test financial controls, and Deloitte Touche Tohmatsu prepares tax returns for Sun's expatriate employees. With new federal rules beefing up the audit process, "it's our firm belief that [Ernst & Young] should focus specifically on the audit," says Stephen T. McGowan, Sun's chief financial officer.

Sun is not alone. After auditors failed to catch financial fraud at Enron and WorldCom (now MCI), Congress ordered companies to quit hiring their auditors for a slew of services, from bookkeeping to computer-systems design. The 2002 Sarbanes-Oxley corporate-reform act left it up to boards' audit committees to decide whether the same accounting firm could provide other services -- including tax advice. But with audit committees eager to avoid any chance for conflicts, more companies, from General Electric to Home Depot to American Express, are switching their tax work, too.

Now they have another reason to play it safe. On Dec. 14, the Public Company Accounting Oversight Board proposed stricter curbs on audit firms selling tax services to their clients. The board, created by Sarbanes-Oxley, says it wants to ban auditors from promoting aggressive tax shelters to client companies and their top execs. It also wants to keep them from accepting contingent fees, payments based on a percentage of their clients' tax savings. Also off limits: offering tax services to top company officers. The rules, which must be approved by the Securities & Exchange Commission, "draw clear lines to distinguish inappropriate services that impair auditor independence from permissible services that are not detrimental," says PCAOB Chairman William J. McDonough.

Auditors: The Leash Gets Shorter

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