WASHINGTON - Responding in part to pressure from the banking industry, the Securities and Exchange Commission agreed Wednesday to let accountants perform internal and external audits for businesses with less than $200 million of assets.
The decision creates an exemption to a rule the SEC approved Wednesday in final form after months of acrimonious debate.
The rule, designed to ensure auditor independence, limits the kind and amount of nonaudit services an accounting firm may perform for a publicly traded audit client. It allows a public company to use the same firm that performs its external audit to complete up to 40% of its internal audit. However, companies under $200 million are exempt from the limit.
Nearly 73% of the country's 10,600 banks and thrifts have assets of $200 million or less, according to the Federal Deposit Insurance Corp.
When the rule was proposed in May, the SEC said it planned to bar public companies from using the same auditor for both internal and external audits. Bank regulators and trade groups opposed the idea, arguing it could drive small rural banks to abandon external audits.
In testimony before the SEC in July, Comptroller of the Currency John D. Hawke Jr. said that while banks with assets of under $500 million are not required to perform external audits, many do.
"I would be concerned if a rigid application of a rule against outsourcing internal audits caused some smaller institutions to elect to forgo such audits, in order to be able to continue outsourcing internal audit functions to the same firm they had been using for external opinion audits," he said.
Ann Grochala, director of bank operations at the Independent Community Bankers of America, said small banks, particularly those located in areas where there may not be a wide range of choices for auditing services, would have little choice but to forgo external audits.
The Office of the Comptroller of the Currency and the community bank trade group praised the SEC's final decision.
"I am very pleased that the commission provided an exemption for smaller banks," Mr. Hawke said on Wednesday.
Ms. Grochala said her group would like "to see the limit higher - $500 million would be better - but we are certainly pleased with getting some type of carve-out."
The accounting industry had also opposed the original rule proposal, mainly because it would have limited the nonaudit services they could provide audit clients. Since 1986 the percentage of accounting firm's income derived from audit and accounting fees has declined by more than half, to 34%, replaced by fees for consulting and other services, according to the SEC.
The final rule was the product of last-minute compromises by the SEC and major accounting firms. Among other concessions, the SEC relaxed its restrictions on nonaudit services that audit clients may purchase from accounting firms. The agency also narrowed the range of audit firm employees and their relatives whose employment with, or investment in, a client firm would be deemed an impairment to auditor independence.
SEC Chairman Arthur Levitt said the rule "strikes a balance that serves the interests of American investors while remaining flexible and adaptable to the unforeseen changes in tomorrow's marketplace."
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