Accountant Liability in the Current Regulatory Environment: Risk Control Is a Full Time Job!

Transcription

1 Accountant Liability in the Current Regulatory Environment: Risk Control Is a Full Time Job! THOMAS P. VARTANIAN FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP WASHINGTON, DC vartath@ffhsj.com

2 Risk Exposures g Criminal Liability Sarbanes Oxley Provisions g High Risk Areas Derivatives FAS 133 Earnings Management Independence/Conflicts of Interest Risk Management Off Balance Sheet Items Mortgage Accounting FAS 91 Reserves Certifications Client Fraud

3 Risk Exposures gregulatory Risks Securities Laws & Regulations (SEC) Public Company Accounting Oversight Board (PCAOB) Banking Laws & Regulations (OCC, OTS, FDIC, FRB)

4 The Sarbanes-Oxley Environment g This law says to corporate accountants: the high standards of your profession will be enforced without exception; the auditors will be audited; the accountants will be held to account. gthe Act is designed to deter and punish corporate and accounting fraud and corruption, ensure justice for wrongdoers, and protect the interests of workers and shareholders. - President George W. Bush

5 Criminal Liability garthur Andersen Prosecution/Conviction gsupreme Court: Jury Instructions Incorrect Covered Innocent Conduct gdocument Retention Policies Common Business Practice Retention Policies Are Document Retirement Policies gconsciousness of Wrongdoing Required

6 Criminal Liability gsection 802 / 18 USC 1519 Knowing Destruction, Alteration, Concealment or Falsification of Records, Documents or Tangible Objects Intent to Impede, Obstruct or Influence an Investigation or Proper Administration of Any Matter by Agency or in Relation or Contemplation of Such Matter 20 Years Incarceration

7 Criminal Liability gsec. 804: Increases Statute of Limitations for Securities Fraud to Earlier of: 2 Years From Discovery. 5 Years After the Violations. gsec. 805: New Sentencing Guidelines. Need to Be Harsher for White Collar Criminals gsec. 807: New Penalties for Knowingly Defrauding Shareholders.

8 Criminal Liability gsec. 903, 904: New Penalties for Mail Fraud, Wire Fraud gsec. 906: False Certifications Knowing 10 Years Willful 20 Years

9 Criminal Liability g18 U.S.C Obstruction of an Examination gwhat are Attempts at Obstruction? Delaying Tactics. Screening Tactics. Alteration of Records. Removal of Records. Bad-faith Assertions of Privilege. Misleading Company Counsel or Audit Committee. Attacks on Examiners Credibility.

10 Criminal Liability gsection 1102/18 USC 1512 Corruptly Alters, Destroys, Mutilates or Conceals With Intent to Impair the Object s Integrity Use in an Official Proceeding Otherwise Obstructs, Influences or Impedes Any Official Proceeding 20 Years

11 Criminal Liability White Collar Fraud -No Criminal History -Single Count of Securities Fraud -20 Years in Prison Armed Robbery -No Criminal History: -5-6 Years -Two-Time Felon: -7-9 Years -Career Offender: Years

12 Securities Laws g SEC Rules of Practice 102(e): Provides for Censure, Suspension, or Debarment, for Unethical or Improper Professional Conduct. g Securities Act of 1933 Sec. 8A & Securities Exchange Act of 1934 Sec. 21C: Authority to Bring an Action Against Parties that Cause Another to Violate Securities Laws. g Sarbanes-Oxley Act of 2002 Imposes New Obligations Aimed at Encouraging Corporate Responsibility, Enhancing Financial Disclosures, Combat Corporate and Accounting Fraud. Creates the PCAOB.

13 Powers of the Regulators SEC PCAOB Banking Agencies Demand Accounting Materials Subpoena Accounting Materials/Testimony NO (Must Seek SEC Subpoena) Demand Client Records NO Impose Sanctions Civil Suit for Damages - - FDIC

14 Sanctions Available to the Regulators SEC PCAOB Banking Agencies C&D Debarment, Suspension etc CMP/Restitution Censure Require Corrective Measures

15 Bank Regulatory Agencies g12 U.S.C. 1813(u)(1) Provides Jurisdiction Over Accountants Employed By the Company g12 U.S.C. 1813(u)(4) Provides Jurisdiction Over Independent Contractors Who Act Knowing or Recklessly. gconduct: Violation of Law or Regulation. Engage in Unsafe or Unsound Practices. Breach of Fiduciary Duty.

16 Bank Regulatory Agencies g12 U.S.C. 1831m Removal, Suspension, or Debarment From Performing Audit Services. For Good Cause. gwho is covered? Independent Public Accountants Accounting Firms

17 Bank Regulatory Agencies gwhat Constitutes Good Cause for Debarment? Lack of Requisite Qualifications. Knowing or Reckless Conduct that Violates Professional Standards, Including SEC or PCAOB Standards. Unreasonable Conduct. Providing False or Misleading Information to Regulators. Violation of Banking or Securities Laws, or Sarbanes- Oxley. Other Disciplinary Action by Federal or State Authorities.

18 Bank Regulatory Agencies g New Interagency Guidelines Proposed by OCC, OTS, FRB, FDIC, and NCUA (May 10, 2005). Limitation on Liability Provisions. Auditor Independence. Alternative Dispute Resolution. g A response to Keystone and Superior. Keystone: Regulators Alleged That the Auditors Lack of Independence, Lack of Professional Skepticism, and Tendency to Advocate for the Bank Caused it to Neglect Key Audit Processes and Red Flags of Wrongdoing. Superior: Outside Auditor Attempted to Limit Its Liability by Requiring Alternative Dispute Resolution and Liability Limiting Provisions in Its Engagement Agreements.

19 Independent Auditor Focus in Post-Sarbanes-Oxley Era gaudit Committee Responsibility for Audit Relationship. gnothing Less Than Absolute Independence. gintegrity and Professionalism Over Cost- Effectiveness.

20 Regulatory Red Flags Regarding Internal Audit Functions gmanagement Does Not Implement Procedures to Remedy Internal Control Deficiencies. gmanagement Suspends the Internal Audit Function. gmanagement Has Dual Operations Responsibilities. ginternal Auditor Reports to Management Instead of the Board or Audit Committee.

21 Case Studies ggoldstein & Morris, CPAs, P.C. (PCAOB May 24, 2005) Partners Attempted to Conceal Improper Accounting Methods Used in Public Audits. Partner-in-Charge and the Firm were Debarred.

22 Case Studies Case Studies U. S. v. Thomas C. Trauger, CPA (2003) gformer Partner With an Outside Auditor, While Auditing NextCard, Inc., Altered or Destroyed Documents to Impede an Investigation. garrested by FBI for Obstruction of SEC and OCC. gpled Guilty, Sentenced to 12 Months Imprisonment, $5,000 Fine, and 2 Years Supervised Release. gsignificance: One of the First Cases of an Auditor Pleading Guilty to Destroying Key Documents in an Effort to Obstruct a Federal Investigation.

23 Case Studies In Re Grant Thornton, OCC-AA-EC /03 (November 2004) g OCC Alleged That Grant Thornton Was Engaged to Conduct an Audit of FNB of Keystone. g In 1999 Grant Thornton Issued an Unqualified Audit Opinion of Keystone s 1998 Financial Statements. g Regulators Later Discovered that the Financial Statements Were Overstated by Nearly $500 Million. g OCC Alleged That Grant Thornton: Failed to Comply With the Requirements of GAAS and GAAP. Exhibited Reckless Unsafe and Unsound Practices. Ignored Professional Standards of Independence and Professional Skepticism. g OCC is Seeking Fines and Corrective Measures. g Decision Expected Summer g Significance: Bank Regulator Proceeding Against an Entire Firm.

24 Avoiding Problem Clients gpre-engagement Considerations Client s Regulatory History. Independence and Professional Skepticism. Dealing With the Regulators. Auditing v. Consulting. gwell-developed Acceptance and Retention Policies. gcontents of Engagement and Retention Policies. gmaintaining Independence in Fact and Appearance. gon-going Engagement Evaluation.