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Investors Are Pushing for Audit Reform

Accounting: Pension funds are urging firms not to use same company as consultant, to avoid conflicts of interest.


The demise of once-mighty Enron Corp. is beginning to reverberate across corporate America as companies come under increasing pressure from investors to reform their auditing procedures.

In formal requests to about 30 large corporations, several pension funds have asked them to stop the widespread practice of hiring the same firm as both an auditor and as an outside consultant.

The pension funds want to eliminate a perceived conflict of interest that has drawn considerable attention in the Enron debacle.

Critics worry that accountants, in their quest to nab lucrative consulting work, may overlook questionable corporate accounting to curry favor with company management.

Enron paid Andersen, its accounting firm, $25 million in auditing fees in 2000. It paid $27 million for outside consulting services.

Consulting fees far exceed audit charges at many companies, according to data from the United Brotherhood of Carpenters. Kmart Corp., for example, pays its accounting firm 10 times as much for consulting as it does for auditing. At Apple Computer Inc., the ratio is almost 13 to 1.

"Enron's the train wreck," said Ed Durkin, director of special programs for the carpenters union. "What we're trying to accomplish is [corporate] governance practices and structures that keep those train wrecks from happening."

Corporate governance refers to the basic structure by which boards of directors and top executives operate companies.

Corporate-governance activists say the effort to separate audit and non-audit work could be the opening salvo in a larger effort to clean up a variety of perceived conflicts. The proposals are intended to prevent accountants from becoming too cozy with the companies they audit.

TIAA-CREF, the world's largest pension-fund manager, is contemplating a proposal that would force companies to switch auditing firms every few years, said Ken Bertsch, the fund's corporate-governance director. Another possible proposal would bar companies from hiring top managers from their accounting firms. That would block a revolving door between some companies and accounting firms.

The pension-fund proposals are in the form of shareholder resolutions to be voted on by investors at companies' annual meetings. The resolutions are nonbinding, meaning managements do not have to comply with them.

Resolutions sponsored by outsiders rarely pass. But sizable support from shareholders would send an important message, pension funds say.

"Long term, to oppose those concepts would be very foolish," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

Traditionally, companies have opposed most shareholder resolutions, arguing that they intrude on management decision-making. Companies routinely ask the Securities and Exchange Commission for permission to block shareholder votes on the issues, experts say.

Corporate-governance activists believe that companies will oppose the auditor independence resolutions.

Walt Disney Co., for example, asked the SEC for the right to block a shareholder vote, said Joyce Mader, an attorney for the mutual fund sponsoring the proposal. The SEC rejected the request, and the resolution will be voted on at Disney's meeting Feb. 19.

In the official shareholder ballot, known as a proxy statement, Disney says it opposes a proposal submitted by a mutual fund associated with the United Assn. of Plumbers and Pipefitters. Disney said safeguards are in place to ensure the independence of its auditor, PriceWaterhouseCoopers.

"There is little chance for abuse and no benefit to the company or its shareholders from an arbitrary limitation on the power of management and the board of directors to exercise business judgment," Disney contends in the proxy.

A Disney spokeswoman declined to comment further.

Governance activists acknowledge that the resolutions have only so much impact on company managements, but say they add to the pressure companies are feeling.

"It's unlikely that companies will actually change their practices strictly as a result of this proposal," said Carol Bowie, head of corporate-governance research at the Investor Responsibility Research Center, an institutional-investor consulting firm. "But it may well be just one more nail in the coffin of auditor consulting."

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