SEC Proposes Auditor Independence and Workpaper Retention Rules Required under Sarbanes-Oxley, Agrees to Issue Report on Anti-Money Laundering Rules

FOR IMMEDIATE RELEASE
2002-165

Washington, D.C., November 19, 2002 - The Securities and Exchange Commission today approved publication of proposed rules that would require auditors to retain specific types of records. A second set of rules would require certain disclosures and reports by auditors and set conditions under which auditing firms would not be considered independent for purposes of performing audits of public company financial statements. These rules are required under the Sarbanes-Oxley Act. The Commission also approved a staff recommendation to issue a report jointly with the Department of the Treasury and the Board of Governors of the Federal Reserve System concerning the application of anti-money laundering rules to investment companies under the USA Patriot Act.

1. The Commission voted to propose rules to implement Section 802 of the Sarbanes-Oxley Act of 2002. These proposed rules would specify the information that must be retained by auditors for a five-year period subsequent to the completion of an audit or review of a registrant's financial statements. In particular, the proposed rules would specify that auditors should retain workpapers and other documents that form the basis of the audit or review and memoranda, correspondence, communications, other documents, and records (including electronic records), which are created, sent or received in connection with the audit or review and contain conclusions, opinions, analyses, or financial data related to the audit or review. The Sarbanes-Oxley Act requires that final rules be in place by Jan. 26, 2003. Comments on the proposal should be received by the Commission within 30 days of publication in the Federal Register.
    
2. The Commission voted to propose rules to enhance the independence of accountants that audit and review financial statements and prepare attestation reports filed with the Commission. As directed by Section 208(a) of the Sarbanes-Oxley Act of 2002, the Commission is proposing rules to:
    
   • revise its regulations related to the non-audit services that, if provided to an audit client, would impair an accounting firm's independence (based on the nine prohibited services listed in Sarbanes-Oxley);
      
   • require that an issuer's audit committee pre-approve all audit and non-audit services provided to the issuer by the auditor of an issuer's financial statements;
      
   • prohibit partners on the audit engagement team from providing audit services to the issuer for more than five consecutive years and from returning to audit services with the same issuer within five years;
      
   • prohibit an accounting firm from auditing an audit client's financial statements if certain members of management of that client had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures;
      
   • require that the auditor of an issuer's financial statements report certain matters to the issuer's audit committee, including "critical" accounting policies used by the issuer; and
      
   • require disclosures to investors of information related to the audit and non-audit services provided by, and fees paid by the issuer to, the auditor of the issuer's financial statements. The disclosures, to be made in issuers' annual reports, would include fees paid by issuers for audits, tax preparation and all other fees. The proposal would require disclosure of fees for the year covered by the filing and for the previous year.
      
   In addition, under the proposed rules, an accountant would not be independent from an audit client if any partner, principal or shareholder of the accounting firm who is a member of the engagement team received compensation based directly on any service provided or sold to that client other than audit, review and attest services. The Sarbanes-Oxley Act requires that final rules be in place by Jan. 26, 2003. Comments on the proposal should be received by the Commission within 30 days of publication in the Federal Register.
    
   
3. The Commission approved a staff recommendation to issue jointly, with the Department of the Treasury and the Board of Governors of the Federal Reserve System, a report to Congress on applying the anti-money laundering requirements of the Bank Secrecy Act to investment companies, as required by Section 356(c) of the USA Patriot Act. The proposed report recommends regulations to apply the requirements of the Bank Secrecy Act to investment companies, including certain unregistered investment companies. The report will be published after approval by the Department of the Treasury and the Board of Governors of the Federal Reserve System.

The full text of the detailed releases concerning the proposed rules will be posted to the SEC Web site as soon as possible.