SEC Adopts New Audit Requirements
T he Securities and Exchange Commission adopted revisions to its rules-imposed under the Private Securities Litigation Reform Act of 1995-that, as of April 17, require auditors to report a client's uncorrected illegal acts to the client's board of directors and to the SEC if the board does not do so.
The 1995 act imposed the audit requirements by adding section 10A to the 1934 Securities Exchange Act (for more information on the act, see "Tort Reform Revolution" and "The Reform Act: What CPAs Should Know," JofA, Sept.96, pages 53-58). One of the act's objectives was to detect and disclose fraudulent acts before they cause losses that give rise to lawsuits. To do this, the SEC adopted the section 10A rules, which require auditors-if they become aware that an illegal act has occurred-to determine its possible effect on the client's financial statements and to inform the company's management "as soon as practicable." The auditors also must ensure the client's board of directors has been informed of the illegal act.
Robert H. Herz, chairman of the American Institute of CPAs SEC regulations committee, said the revisions provide auditors with a whole sequence of events they are bound by law to observe. "The new SEC rules make it very clear at what point auditors have to inform the board and the SEC," said Herz. "CPA firms will have to implement their own procedures to ensure these rules are followed."
According to the revised rules, the board of directors has only one business day in which to notify the SEC if it receives notification from the auditors of a fraudulent act. If the auditors do not receive a copy of the board's notification to the SEC within one day, "by the end of the next business day" the auditors are required to furnish directly to the SEC a copy of the report given to the board of directors. The SEC warns that resignation from the audit does not negate the auditors' obligation to furnish the report to the SEC.
The SEC also adopted an amendment to conform the definition of audit in regulation S-X with section 10A. According to the SEC, the amendment's purpose was to alert auditors and public companies that, in certain circumstances, the SEC could require audit procedures in addition to those required by generally accepted auditing standards.
The SEC received a number of comment letters, including one from the AICPA, objecting to the amendment on the grounds that the SEC's statutory authority to modify or supplement GAAS was limited to certain circumstances set forth in section 10A. Although the SEC rejected the objection, it included in its revisions notice that it would continue its practice of "looking to the private-sector standard-setting bodies designated by the accounting profession to provide leadership in establishing and improving GAAS."
For more information on the new audit requirements, contact Robert E. Burns or W. Scott Bayless, SEC Office of the Chief Accountant, at 202-942-4400 or Kathleen Clarke, SEC Division of Investment Management, at 202-942-0724.
SEC Highlights Resources for Small Companies
T he Securities and Exchange Commission issued a policy statement outlining its informal guidance program (which includes publications, responses to inquiries by telephone and computer and interpretive letters) for small entities. The Small Business Regulatory Enforcement Fairness Act of 1996 requires the agency to review the various ways it provides informal compliance guidance to ensure it is responding effectively to the needs of small companies.
After determining it was in compliance with the act, the SEC issued the policy statement as a comprehensive resource for small companies that need information or advice. The statement lists the following divisions at the SEC headquarters in Washington, D.C., that facilitate informal guidance:
- The Division of Investment Management, which responds to telephone and written inquiries relating to investment companies and investment advisers (telephone: 202-942-0659; or write to Division of Investment Management, 450 5th Street, N.W., Washington, D.C. 20549).
- The Division of Market Regulation, which responds to telephone and e-mail inquiries on securities markets, including exchanges and market intermediaries, such as broker-dealers and transfer agents (202-942-0073; e-mail: firstname.lastname@example.org ).
- The Division of Corporation Finance, which responds to telephone inquiries on small business matters through its Office of Small Business (202-942-2950), or all other inquiries about the offer and sale of securities as well as issuer and ownership reporting and stockholder voting (202-942-2900; e-mail: email@example.com ).
- The Office of Chief Accountant, which responds to telephone and written inquiries on financial reporting matters, including auditor independence, interpretations of Financial Accounting Standards Board standards and SEC reporting requirements under regulation S-X (202-942-4400).
The SEC provides written advice in the form of no-action and interpretive letters. An SEC division will not recommend any enforcement action if the requesting party acts in accordance with specific facts and representations made in its letter. Companies can obtain the address of an SEC division by calling toll-free 800-732-0330.
The SEC also provides sources for general information outside the informal guidance program, including
- The Municipal Securities Ombudsman (telephone: 202-942-7300; e-mail: firstname.lastname@example.org ).
- The SEC Web site ( http://www.sec.gov ).
- General publications and information, including information on filings and releases (800-732-0330).
Copies of the policy statement (release no. 33-7407) can be
obtained online at http://www.sec.gov
, or by faxing a request to 202-628-9001.