SEC Adopts Final Rules Prohibiting Improper Influence of Accountants
On May 20, 2003, the SEC published final rules to implement Section 303 of the Sarbanes-Oxley Act of 2002. The new rules prohibit actions that improperly influence or mislead accountants and supplement the rules currently in Regulation 13B-2. The SEC’s adopting release can be found on the SEC’s website at http://www.sec.gov/rules/final/34-47890.htm. The new rules become effective on June 27, 2003.
Prohibiting Improper Influence of Accountants
New Rule 13b2-2(b)(1)1 makes it unlawful for any officer or director of a company, or any person acting under the direction of any such person, to take directly or indirectly any action to coerce, manipulate, mislead or fraudulently influence any independent public or certified public accountant engaged in the performance of an audit or review of the financial statements of that company if that person knew or should have known that such action could, if successful, result in such financial statements being materially misleading.
Rule 13b2-2(b)(2) includes a non-exclusive list of actions that constitute a violation of Rule 13b2-2(b)(1). These include actions taken at any time with respect to the professional engagement to coerce, manipulate, mislead or fraudulently induce an auditor:
to issue or reissue a report on the company’s financial statements that is not warranted in the circumstances (due to material violations of generally accepted accounting principles, generally accepted auditing standards (“GAAS”), or other professional or regulatory standards);
to not perform an audit, review or other procedure required by GAAS or other professional standards;
to not withdraw an issued report when withdrawal is required by GAAS; or
to not communicate matters to a company’s audit committee.
Section 303(a) of the Sarbanes-Oxley Act provides that only the SEC has authority to bring an action to enforce the new rules.
The adopting release explains that the SEC interprets the phrase “under the direction of” an officer or director to encompass a broader category of relationships than “supervision.” For example, someone may be acting under the direction of an officer or director even if he or she is not under the supervision or control of that person. The release indicates that persons acting “under the direction of” others may include not only the issuer’s employees but also, for example, customers, vendors, or creditors who, under the direction of an officer or director, provide false or misleading confirmations or other false or misleading information to auditors, or enter into “side agreements.” The release also states that, in appropriate circumstances, persons acting under the direction of officers and directors may also include other partners or employees of the accounting firm and lawyers, security professionals, or other advisors who, for example, pressure an auditor to limit the scope of an audit, to issue an unqualified report on the financial statements when such a report would be unwarranted, not to object to an inappropriate accounting treatment, or not to withdraw an issued opinion on the company’s financial statements.
The types of conduct that the SEC believes might constitute improper influence include:
offering 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;
canceling or threatening to cancel existing non-audit or audit engagements if the auditor objects to the company’s accounting;
seeking to have a partner removed from the audit engagement because the partner objects to the company’s accounting; and
blackmailing and making physical threats.
The release also states that the rule would be effective during any time an auditor is called upon to make decisions regarding a company’s financial statements, including after the engagement is over, when deciding whether to issue a consent.
For more information regarding these proposed rules, please contact your regular Baker Hostetler LLP contact person.
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New Rule 13b2-2(a), which is substantially the same as existing Rule 13b2-2, prohibits any director or officer of a company in connection with any audit or examination of the financial statements of the company or the preparation or filing of any document or report required to be filed by it with the SEC from (i) making or causing to be made a materially false or misleading statement to an accountant, or (ii) omitting to state, or causing another person to omit to state, any material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading to an accountant.