'Trickle-Down Effect' Of New SEC Rules Could Soak Small Firms Too.

On June 27, 2000, the U.S. Securities and Exchange Commission (SEC) issued a proposal for a major new rule that, if enacted, would force a restructuring of the accounting profession and radically alter independence requirements for accounting firms that audit SEC registrants. This is the most significant proposition on auditor independence since the current federal securities laws were first enacted in the 1930s, and, with the Big Five firms and the SEC sparring over the proposed changes in hearing rooms and on the nation's leading editorial pages, the issue certainly has not lacked for attention.

But are the independent firms who audit nonpublic companies paying attention? They should be, because even accounting firms that do not audit SEC registrants could be seriously impacted as the effects of the proposed new rule trickle--if not cascade--down through the profession. After all, restrictions placed on the operations of large, multinational firms could ultimately be placed on the operations of smaller, more localized firms.

If enacted, the SEC rules would be viewed as the new model by state legislators and state boards of accountancy, as well as by federal bank regulators and the Department of Labor (DoL) in establishing "independence" rules that apply in their respective areas--such as ERISA accounting in the case of the DoL. These new proposed SEC rules could influence the regulatory approach to auditor independence outside the United States, as well.

A limit on service offerings

The most significant aspect of the proposed rules are those provisions that would dramatically curtail the ability of accounting firms to provide services other than audit and tax services to SEC audit clients. This is particularly important as firms of all sizes are expanding their service offerings in order to survive and thrive in this rapidly changing and highly competitive economy and in order to provide convenient "one-stop shopping" to their clients.

Specifically, firms would be prohibited from providing the following 10 enumerated categories of nonaudit services, some of which have not previously been prohibited by the SEC:

1. Bookkeeping or other services related to the audit client's accounting records or financial statements

2. Financial information systems design and implementation, including the design or implementation of a hardware or software system used to generate information that is "significant" (i.e., reasonably likely to be material) to the...