WASHINGTON (Dow Jones)--Consumer and investor advocates raised concerns Wednesday about giving new legal protections to accountants who can show they used "reasonable" professional judgment in reviewing a company's books.
An advisory committee to the Securities and Exchange Commission headed by MFS Investment Management Inc. Chairman Robert Pozen recommended such an approach in an interim report this month. The Pozen committee is slated to issue its final report to the SEC this summer.
The idea: have the SEC and the Public Company Accounting Oversight Board establish a clear list of do's and don'ts on exercising professional judgment, and create a "safe harbor" that protects accountants and auditors who follow the framework from SEC enforcement actions or private lawsuits.
Members of a standing PCAOB advisory committee had mixed reaction to the idea, with many criticizing it at a public meeting here Wednesday.
"There should not be a safe harbor," said Lynn Turner, the former SEC chief accountant. He also questioned the need for a judgment framework, saying most of the proposal already appears in U.S. accounting rules or reflects common sense - something Turner said should not have to be spelled out by regulators.
Barbara Roper, the director of investor protection for the Consumer Federation of America, called the proposal a naive one that could be "easy to manipulate by the next Andy Fastow," referring to Enron Corp.'s former chief financial officer, now in prison for securities fraud.
Institutional investors are likely to balk at anything that restricts the SEC's ability to bring enforcement actions, said Jeffrey Mahoney, general counsel for the Council of Institutional Investors. He urged the SEC advisory committee to hold off on its proposal pending the release of a study of financial restatements being prepared for the U.S. Treasury Department.
Supporters of the concept said the U.S. needs a clear framework in place for accounting professionals, particularly if it considers moving to international accounting standards, which have fewer hard and fast rules than U.S. accounting.
"There is a need for this," said Vincent Coleman, a certified public accountant who is the U.S. national office professional practice leader for PricewaterhouseCoopers LLP. Coleman said it would be helpful to have regulators acknowledge that there may be more than one right answer to complex accounting or auditing questions, and to protect accounting professionals from unreasonable second-guessing.
Accountants want clarity, not "a free pass," stressed Randy Fletchall, vice chairman of professional practice and risk management at Ernst & Young. He also said that without a judgment framework in place, efforts to move the U.S. to international accounting "will not be successful."
Accountants who want to do the right thing may benefit from a judgment framework, but those bent on wrongdoing might exploit it, other advisory panel members cautioned. Turner compared the proposed framework to the Ten Commandments, suggesting that no matter how clear the standards are, they are sure to be broken.
Several advisory committee members urged the SEC advisory group to retool the proposed professional judgment framework and drop the idea of providing any legal protections to those who use it.
"I think where people get uptight is when you start talking safe harbors," said Joseph Carcello, a professor at the University of Tennessee in Nashville, and director of research at its corporate governance center.
-By Judith Burns, Dow Jones Newswires; 202-862-6692;
judith.burns@dowjones.com