SEC's Cutler Warns Firms of Tougher Penalties

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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."

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