SEC Chief Defends Stance on Audit Committees

WASHINGTON â€”  Securities and Exchange Commission Chairman David S. Ruder on Monday defended his agency’s decision last week to stop short of requiring all public companies to maintain independent board of directors’ audit committees.

In heated testimony before the House oversight and investigations subcommittee, Ruder held firm to an SEC vote last Wednesday to encourage, rather than require, that all public companies have independent audit committees.

Mandatory formation of audit committees made up entirely of directors who do not work in any other capacity for a company was among a list of recommendations made last October by the National Commission on Fraudulent Financial Reporting.

The national commission’s recommendations target ways to improve financial reporting by public firms, thus ensuring an accurate flow of information to investors in the marketplace.

The SEC’s five commissioners last week narrowly approved a modified version of a national commission recommendation that calls on stock exchanges and the National Assn. of Securities Dealers to “encourage� movement toward firms listed on those exchanges having independent audit committees.

Exchange Rules Differ

The SEC also embraced other national commission proposals including a measure that would allow the SEC to levy fines for a wide range of securities law violations instead of only insider trading offenses as currently permitted.

Currently, the New York Stock Exchange requires all listed firms to have entirely independent audit committees, while NASD requires some of its listed firms to have audit committees with a majority of independent directors.

The American Stock Exchange recommends, but does not require, that all of its listed companies have fully independent audit committees.

While agreeing with the subcommittee on the importance of independent audit committees as a safeguard against fraud in the financial records of public companies, Ruder said that independent audit committees may not be appropriate for all firms, especially smaller ones.

“We do have to protect small businesses. The question is how can we put (an independent auditors committee) system into place without being injurious to small business,� Ruder said, citing the extra expense of hiring independent directors.

The exchanges and NASD will be better able to discover objections and problems associated with requiring independent audit committees if encouraged to move toward new standards themselves rather than by SEC order, Ruder said.