Auditing 2


The Big Five accounting firms agreed to participate in an SEC-sponsored retrospective review program. Under the agreement, the firms will report certain instances, during a specific period, in which they did not adhere to the new proposed independence rules limiting financial interests in audit clients by firms, auditors and some of their immediate relatives. The SEC offered the firms safe harbor from enforcement in exchange for their self-review efforts. The firms are expected to implement systems, procedures and internal controls that will help auditors comply with investment guidelines.

Because PricewaterhouseCoopers in late 1999 had undergone a far more extensive review of compliance with the old, more stringent rules and had upgraded its investment-tracking system, the SEC is allowing it to participate in the program without further scrutiny.

Although the firms have immunity from potential enforcement action for many types of violations, the program does not excuse the most serious infractions, such as a firm’s or audit manager’s ownership of stock in an audit client.

The agreement also guarantees that, when violations meet the safe-harbor requirements, any related SEC filings by the firms’ clients will not be affected by enforcement actions. There may be an impact, however, on any filings associated with violations that do not satisfy the immunity criteria.

For a firm’s violations to qualify for the amnesty program, they must have occurred during the period being reviewed—a time frame of at least nine months, ending March 31, 2000. In addition, any violations must be reported while the reviews are being performed—on or after June 15, 2000, but no later than June 15, 2001.

Any firm practicing before the SEC was eligible to participate in the program, provided it agreed to do so by the time the reviews began. Firms that chose to participate had to retain independent legal counsel to oversee their self-reviews.

Working in concert with their independent counsels, firms are required to identify certain instances in which they, their staff or some of their immediate family members held any of the following prohibited investments during the review period:

  • Any direct investment in securities of an SEC audit client, including those held in a brokerage account or IRA.

  • Any prohibited loan, including a margin account loan, from an SEC client.

  • Any employee-benefit-plan account, such as a 401(k), holding securities of an SEC audit client, except when the account is held by or for the spouse or dependent of a firm partner or professional employee.

In addition to the firms’ own investments, the reviews will examine those of a limited number of individuals employed by, or related to employees of, the firm when the review program started:

  • Audit partners and professional employees who worked on an audit.

  • Partners, such as supervisors, who were in a position to influence the outcome of an audit.

  • Partners not included in the above categories but who were located in an office or practice unit that participated in a significant portion of an audit.

  • Nonaudit partners and managerial employees, such as consultants, who provided a significant amount of nonaudit services to an SEC-registered audit client.

  • Spouses and dependents of the above individuals.

Upon completion of the reviews, participating firms will share their findings with the SEC and their clients’ audit committees, and the SEC subsequently will issue a report.

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