BLUE RIBBON PANEL HAS A LIST TO MAKE ACCOUNTING REPORTS MORE ACCOUNTABLE: 10 RECOMMENDATIONS AIM AT MORE ACCURACY

If top Wall Street and accounting executives get their way, only independent directors will be able to serve on audit committees for public companies bigger than $200 million in market capitalization.

A blue ribbon committee, appointed by the National Association of Securities Dealers and the New York Stock Exchange in response to concerns about the accuracy of company financial reports, released 10 recommendations, including this one, early last week.

The panel was appointed last September after Securities and Exchange Commission Chairman Arthur Levitt began to express concern that many companies are filing misleading financial reports to make their earnings more palatable to investors in the increasingly volatile stock market.

Earlier this year the SEC brought several high-profile cases — such as one accusing clothing manufacturer Donnkenny Inc. and four former executives of filing fraudulent financial statements — and it settled a case against PricewaterhouseCoopers LLP, which it charged with violating auditor independence rules.

“For some years there has been a growing concern about financial reporting,” says committee co-chairman Ira Millstein, senior partner of New York law firm Weil Gotshal & Manges LLP. “That concern is primarily fueled by a perceived need for corporations to constantly make the numbers, to match or exceed analysts’ expectations and projections.”

While some reports may not violate generally accepted accounting standards, he says, they “may obscure the true condition of the company.” Mr. Levitt adds that the SEC can not prescribe “by regulation that which can only be fully achieved by competence, desire and an acceptance and acknowledgment of the public interest.”

The recommendations are not intended to create new liabilities for companies, Mr. Millstein adds. “The law doesn’t require directors and audit committees always to have the correct answers. The law only requires that directors engage in a diligent, honest and independent-minded process to exercise their oversight responsibilities,” he says.

all deliberate speed

While there is no timetable for adopting the rules, which would have to be approved by the SEC, Mr. Levitt says he expects “that all participants in the financial reporting process will move to put these recommendations into practice sooner rather than later.”

The recommendations generally are aimed at strengthening the independence of audit committees by prohibiting members who have been connected with the company in any way for five years before signing off on a financial report from giving guidance in how the committees should operate, and at improving accountability for reports by outside auditors, management and the audit committee.

Included among the recommendations is one stipulating that companies with a market capitalization of more than $200 million have an audit committee including at least three directors who are “financially literate,” and that at least one member have accounting or financial management expertise. Standards for determining financial literacy are laid out in the report.

The committees should adopt written charters specifying their responsibilities, and they should publicly disclose their activities to shareholders.

“The dynamic nature of today’s capital markets creates issues that increasingly move beyond the bright line of right and wrong,” Mr. Levitt says. “It is in this realm where judgment and integrity are indispensable to high-quality and transparent financial reporting.”

The American Institute of Certified Public Accountants, based in New York, declined comment on the report, but issued a statement saying in part: “All members of the financial community are and will be called upon to participate in the task of successfully addressing the need for continued improvement in financial reporting.”