CalPERS Mulls Over Continuing Outside Audit Issue Pressure

September 12, 2003 ( - The California Public Employees' Retirement System (CalPERS) is considering whether to maintain its protest against companies employing outside auditors for other services even when complying with regulatory standards.

Even though new regulations were issued in January by the US Securities and Exchange Commission (SEC) barring audit companies from performing certain non-audit services – such as providing investment advice or investment banking activities – the $144.8-billion pension fund said it remains concerned about a number of exceptions to those standards, according to a Reuters report.

For example, auditors are normally barred from working on financial information systems design, though the SEC says they may do so in cases where the system is unrelated to the client’s financial statements or accounting records.   “CalPERS’ position has been that a bright line test should be applied to auditor independence, and that the auditor should provide strictly audit services to an audit client in order to maintain independence,” the fund’s staff said in the recommendation posted on its Web site.

CalPERS points to its own analysis for potential conflicts of interest in such arrangements.   External audit firms working for 1,000 companies CalPERS examined drew about half of their revenue from services outside auditing, such as consulting.   Therein lies the rub says CalPERS staff, who have asked the fund’s board to authorize the withholding of its vote for corporate board members who serve on a company’s audit committee when those companies use their external auditors for other services.