- SEC Proposed New Rules Prohibiting Improper Influence of Accountants Under the Sarbanes-Oxley Act of 2002
- October 21, 2003 | Authors: D. Scott Freed; Sonia Galindo; Frank S. Jones
- Law Firm: Whiteford, Taylor & Preston L.L.P. - Baltimore Office
The Securities and Exchange Commission ("SEC") published for comment proposed new rules implementing Section 303(a) of the Sarbanes-Oxley Act. SEC Release No. 34-46685, available at http://www.sec.gov/rules/proposed/34-46685.htm. The proposed new rules are briefly summarized below.
Under proposed Rule 13b2-2(b), it would be unlawful for any officer or director of an issuer, or any other person acting under their direction, to take any action, directly or indirectly, to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the performance of an audit or review of the financial statements of an issuer that are required to be filed with the SEC if that person knew, or was unreasonable in not knowing, that such action could, if successful, result in rendering such financial statements materially misleading.
The SEC has defined the term "officer" to include the company's chief executive officer, president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions with respect to any organization whether incorporated or unincorporated. The term "officer" also includes any other executive officers of an issuer. The release makes clear that the SEC regards the group of "persons acting under the direction thereof" who could potentially be liable under the rule as having broad scope, beyond directors and officers and people who report to them, and also potentially including customers, vendors, creditors, other partners or employees of the accounting firm, attorneys, securities professionals and other advisers who act under the direction of an officer or director. The SEC explains in the release that its intention is that no "specific direction" by an officer or director that a person improperly influence an auditor is required for a violation.
Actions that "could, if successful, result in rendering such financial statements materially misleading" include those to improperly influence an auditor to: (1) issue an unwarranted report on an issuer's financial statements (due to material violations of GAAP, GAAS or other standards), (2) not perform audit, review or other procedures required by GAAS or other professional standards, (3) not withdraw an issued report, or (4) fail to communicate matters to an issuer's audit committee.
In the release, the SEC also states that the rule could be violated by conduct "that did not succeed in affecting the audit or review" and offers a non-exclusive list of conduct that could fraudulently influence, coerce, manipulate, or mislead an auditor for purposes of this rule:
- offering and/or paying bribes or other financial incentives, including offering future employment or contracts for non-audit services
- providing an auditor with inaccurate or misleading legal analysis
- threatening to cancel or canceling existing engagements if the auditor objects to the issuer's accounting
- seeking to have a partner removed from an audit engagement because he or she objects to the issuer's accounting
- physical threats
While Section 303(a) of Sarbanes-Oxley refers to barring actions to "fraudulently influence, coerce, manipulate, or mislead" an auditor, the release signals the SEC's belief that a state of mind short of fraud would be sufficient to violate the rule. For instance, the SEC states that it regards "fraudulent" in the preceding sentence as only modifying "influence," and not "coerce," "manipulate" or "mislead." This construction puts an even more important emphasis on the adequacy of disclosure made in communications between representatives of the issuer and auditors.
The release also clarifies that the rule would be effective during any time the auditor is called upon to make decisions regarding the issuer's financial statements, including after the end of the engagement when issuing a consent. The SEC has exclusive authority to enforce Section 303(a) of Sarbanes-Oxley and there is no private right of action under the rule.
The release invites comments on the proposed rules within 30 days of publication in the Federal Register. The Sarbanes-Oxley Act requires the SEC to issue final rules before April 26, 2003.