SEC's Cutler Warns Firms of Tougher Penalties

Stephen Cutler, Director of the Enforcement Division of the Securities and Exchange Commission (SEC), warned accounting firms of tougher penalties ahead for audit failures. He also provided practical advice on how to avoid the penalties.

Speaking at an AICPA conference on December 12, Mr. Cutler said, "It's time to adopt a new enforcement model," under which the SEC would start bringing enforcement actions for audit misconduct against entire firms, in addition to individual auditors. Under this new model, the firms will need to answer the same types of questions the SEC has been asking companies involved in the recent spate of financial misconduct.

How To Avoid Penalties

The overarching question will be, "Why shouldn't the accounting firm be charged?" To avoid liability, firms will need to provide four broad categories of explanations similar to those required of issuers. Specifically, the partners will need to demonstrate that:

  • The firm has tried its best to be self-policing, meaning it has established rigorous compliance procedures and an appropriate tone at the top.
  • The firm has tried its best to be self-reporting, meaning it conducts thorough reviews of misconduct by any of its partners or employees, then promptly and completely discloses the misconduct to the public, to regulators, and to self-regulators.
  • The firm has attempted remediation, meaning it has dismissed or appropriately disciplined the parties involved and attempted to make monetary amends to the shareholders and the company.
  • The firm has cooperated fully with law enforcement authorities ? a defense that, Mr. Cutler noted, is not entirely consistent with current practice.

Mr. Cutler advised accounting firms the time to start thinking about establishing the systems and procedures needed to demonstrate the above points is now, before any of their partners or staff become embroiled in another audit failure. His advice is designed to help accountants achieve the goal set for the profession earlier in the conference by AICPA Chairman William Ezzell. In his remarks as the keynote speaker for the conference, Mr. Ezzell said, "We want to do everything in our power to make sure the abuses that emerged over the past year never happen again."

You may like these other stories...

Read more from Larry Perry here and in the Today’s World of Audits archive.In my last article, I presented an overview of one of the first steps in the preplanning phase of an audit engagement: reviewing prior year...
Read more from Larry Perry here and in the Today’s World of Audits archive.AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs),...
Read more from Larry Perry here and in the Today’s World of Audits archive.AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs),...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.