SEC official backs shareholders on auditor independence

* Aguilar: SEC has let companies block shareholder proposals

* Proposals were on auditor independence issues

* Aguilar: proposals should be allowed on proxy statements

* Comments come as PCAOB reviews term limits for auditors

By Sarah N. Lynch

WASHINGTON, June 29 (Reuters) - A top U.S. securities regulator is calling for his agency to permit shareholder proposals on auditor independence, saying their voices deserve to be heard given the "the wide prevalence of audit failures."

Luis Aguilar, a Democratic commissioner at the Securities and Exchange Commission, said he is concerned that the agency has regularly sided with companies seeking to block proposals that would require auditor rotation or add transparency to the audit process.

The shareholder proposals being blocked are similar to various policy ideas being considered right now by the Public Company Accounting Oversight Board, or PCAOB, to improve audit quality and independence. Among the plans being considered is a controversial idea to impose term limits on audit firms.

Rather than wait for the PCAOB to act, some shareholders have sought to take matters into their own hands by submitting proposals to improve auditor independence. Aguilar said he is disappointed the SEC has refused to let those proposals be voted on at companies' annual meetings.

"It is only prudent that shareholders, as the owners of their companies, should have a voice on these issues," said Aguilar, according to a speech he gave in Philadelphia earlier this week before the National Association of Public Pension Attorneys.

"In light of the wide prevalence of audit failures so clearly documented by the PCAOB, I respect that shareholders are trying to protect their interests," Aguilar said.

It is unclear whether Aguilar's speech could have an impact on the SEC going forward. SEC staffers, and not commissioners, are the ones who decide whether or not shareholder proposals can be excluded.

But in his speech, Aguilar sought to make the case for why staff should change its thinking.

The concept of auditor rotation has become a lightening rod for debate ever since the PCAOB first started publicly discussing the idea last August.

The idea came to light in the wake of numerous audit deficiencies uncovered during the 2007-2009 financial crisis. Since then, PCAOB examiners have continued to find deficiencies in audit quality.

Those in favor of requiring audit firm rotation say it would help boost independence and keep firms from becoming too cozy with corporate management.

About 35 percent of companies in the S&P 500 index have had the same auditor for 25 years or more. Several have had the same auditor more than a century, according to Audit Analytics data.

But the idea has prompted a strong backlash from the industry, including the Big Four firms - PricewaterhouseCoopers , KPMG, Deloitte & Touche LLC and Ernst & Young LLP.

A mandatory rotation rule would disrupt many long-standing and lucrative business relationships between auditors and corporations, while also forcing audit firms to spend more money competing among themselves for business.

SEC HAS SIDED WITH COMPANIES

Aguilar noted that numerous audit-related shareholder proposals have been put forth in the past year.

Shareholders of companies like Walt Disney, Deere, Alcoa, General Electric and AT&T, for instance, have sought to have proposals requiring the companies to establish an auditor rotation policy imposing a seven-year term limit.

Other proposals submitted by shareholders of CA, Dell and McKesson, he added, called for requiring audit committees to provide annual reports disclosing fees and tenures of audit firms.

Aguilar said many of the companies later sought to exclude the proposals from proxy statements that are required of firms when taking a shareholder vote.

In at least 24 cases during the past year, he said, the SEC's Division of Corporation Finance sided with the companies, effectively blocking them from being put to a vote.

The SEC based its decision on a rule which permits companies to exclude shareholder proposals if they pertain to a company's ordinary business operations.

In his speech, however, Aguilar said he is "not convinced that the engagement of the independent auditor" can be considered a matter of ordinary business operations.

He pointed to an exception in the rule that says if the proposal's underlying subject matter "transcends" the day-to-day business, it cannot be excluded from the proxy statement.

"Given the extensive public discussion...and the long history of debate on this issue, a strong case can be made that shareholder proposals relating to auditor independence and objectivity and audit quality raise significant policy issues and should not be excluded on ordinary business grounds," he said.