AICPA takes enforcement seriously.

As the various investigations into the collapse of Enron move forward, many members are asking what steps the Institute is taking to discipline those who may have violated its Code of Professional Conduct. After all, every member, regardless of place of employment, must adhere to strict ethical requirements and comply with the accounting and auditing standards promulgated by the various regulatory bodies. Violation of the code can result in sanctions ranging from remedial coursework to expulsion from the Institute.

We should be very cautious about painting a broad brush that would condemn the innocent employees of Andersen and Enron along with those who violated our profession's code of conduct in connection with the Enron matter.

That said, the AICPA is actively engaged in investigating the conduct of members who were involved in the collapse of Enron. In order to protect innocent members, however, the fact that an investigation is under way is kept confidential unless and until a member is disciplined for a violation of the Institute's professional standards.

Quality Control Inquiry, Professional Ethics 

As you may know, member firms of the SEC Practice Section are required to report to the Quality Control Inquiry Committee (QCIC) all litigation alleging deficiencies in the conduct of an audit of an SEC client. Andersen is a member of the SEC Practice Section and has always met its professional responsibility of complying with this requirement. When a matter is referred to the QCIC, it immediately performs a review to determine the need for corrective action.

Since its establishment in 1979, the QCIC has conducted hundreds of investigations and has instructed many SEC Practice Section member firms to take specific measures to improve their quality control processes. In some cases it has imposed sanctions, while other times it has made recommendations for changes in generally accepted auditing and accounting standards.

If appropriate, the QCIC will refer a matter to the AICPA's Professional Ethics Division, which is responsible for investigating all allegations of misconduct by individual members. The Ethics Division identifies those individuals from both the company and its auditor who are members of the Institute and therefore subject to investigation. As more facts ate revealed about a particular matter, the number of individuals subject to investigation may increase or decrease. The AICPA takes ethics violations very seriously, and will discipline those who violate the rules.

Ethics Process on Hold During Litigation

According to AICPA rules, members under ethics investigation are permitted to defer the process during pending litigation and regulatory action. If deferral is requested, the SEC Practice Section member firm is required to take one of three actions during this deferral period. It must:

* Terminate or retire the engagement partner,

* Remove that individual from performing or supervising audits of public companies, or

* Subject that individual to additional oversight on all public company audits.

Regardless of pending litigation or regulatory action, AICPA bylaws require the termination of AICPA membership upon final conviction (either after trial or guilty plea) of a crime punishable by imprisonment of more than one year.

New SEC Proposals

To accelerate the investigation of alleged public company audit failures and monitor the quality of audit practice before the SEC, SEC Chairman Harvey Pitt recently proposed the creation of a new, independent disciplinary and monitoring body under the SEC's oversight. The new public regulatory body would operate independently from the AICPA and be made up of a majority of public members. In late Apr., the House of Representatives overwhelmingly approved legislation that would give the SEC broad discretion in establishing such a process.

The AICPA is committed to working with both the SEC and Congress to make Chairman Pitt's proposal a reality. While our disciplinary and peer review processes have served both the public and the profession extremely well for many years, the AICPA has pledged to cooperate fully with the SEC's proposal to change the regulation of the accounting profession to a public regulatory organization for auditors of financial statements of public companies. In today's environment, a robust public regulatory body, independent of the accounting profession and charged with undertaking professional discipline and quality monitoring for auditors of financial statements of public companies, will help maintain confidence in the capital markets, our financial reporting system and the accounting profession.

Two Caveats

The AICPA does, however, have two important caveats to Chairman Pitt's proposals. In the first place, this new public regulatory body is only appropriate for auditors of financial statements of public companies, and not for auditors of the financial statements of privately held companies. And, in the second place, a key to its success will be having a clear purpose and specific charter. Any new public regulatory organization should function as a disciplinary and quality monitoring board, not as a standards setter.