ST. PAUL (AP) -- In the wake of Enron's collapse, Minnesota Attorney General Mike Hatch on Friday presented details of his proposal to prevent accounting firms from providing "substantial" consulting services to firms they also audit.
The goal is to restore confidence in the stock market and to prevent another Enron-style collapse that wipes out employees' retirement savings, Hatch said.
According to a St. Paul Pioneer Press analysis, the state's 91 largest publicly traded companies paid their accounting firms $124.2 million for nonaudit services in the previous fiscal year -- roughly 2.8 times the amount they spent for audit services. In five cases, local companies spent more than 10 times as much on nonaudit fees as on the audits investors rely on.
With millions of dollars in fees on the line, critics argue, auditors may be reluctant to take a tough stance when their clients suggest a creative or aggressive interpretation of accounting rules. That's what they say happened in the case of Enron, which employed a vast web of partnerships to inflate revenue and hide debt.
"They are supposed to be our cops," Hatch said. "They ought to be pure, and they're not."
Hatch's proposal would limit firms that do audit work for a publicly traded firm, or a nonprofit with assets greater than $5 million, to only $10,000 in additional consulting work over the same time period.
"I don't want to be chasing business out of this state, but I do think it's important to make a statement," Hatch said. "At least it sets a standard. We have to have some discussion."
Hatch said he has sponsors for his proposal in the Legislature.
Sen. Doug Johnson, DFL-Tower, chairman of the Senate Finance Committee, said he plans to introduce a bill next week, while Rep. Greg Davids, R-Preston, chairman of the House Commerce Committee, will introduce a bill in the House.
"A lot of legislators are interested in taking a look at this. It seems like there's a tremendous conflict of interest," said Davids, who holds a securities license. "Auditors are supposed to be tough. If you find some irregularities, wouldn't you have a tendency to overlook them if there's also $5 million or $6 million in fees (that could be lost)?"
Not everyone is in complete agreement with this avenue though.
Steve Polacek, the managing partner for Minnesota's office of Arthur Andersen, said the problem needs to be addressed at the federal level.
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