Financial regulators adopt new ground to discipline accountants.
The federal financial regulators already have two other bases for disciplining accountants: the "institution affiliated party" provision of Financial Institutions Regulatory Reform Recovery and Enforcement Act for "knowing or reckless" misconduct, and discipline for "incompetence" or "disreputable" conduct. In addition, the Securities and Exchange Commission long has had the authority to discipline accountants who work on documents filed with it. In 2002, the Sarbanes-Oxley Act created the Public Accounting Oversight Board, which now is charged with primary responsibility for regulating accountants who audit public companies. The SEC, however, lost none of its authority.
Defining "Good Cause"
The new regulations contain a number of significant provisions. The first is the definition of "good cause". The regulations give it an expansive reading, which include not only "knowing or reckless" violations of professional standards, but also conduct that is merely "negligent". This us of negligence as a basis for enforcement action raises a number of issues; all important one is whether the regulation requires gross negligence, as do certain parallel provisions for accountant discipline, or whether ordinary negligence will suffice. The regulations leave this question open. The negligence standard also raises questions about how the "good cause" standard relates to standards for enforcement action by other regulators.
The new regulations authorize regulators to impose "immediate suspension" on accountants, based only on a "reasonable basis to believe" that the accountant "has engaged in conduct" that constitutes "good cause". In "immediate suspension" matters, typical administrative procedures do not apply. The regulatory agency simply issues a notice stating that, in its view, the standard for immediate suspension has been met. The agency order then is "effective upon service". The accountant can obtain a post-suspension heating within the agency, but the burden of persuasion in that hearing is reversed, resting on the accountant, not the agency. It is only after an appeal of the hearing decision within the agency that an accountant finally can go to federal court to challenge the suspension. Ordinarily, the accountant cannot file in federal court until at least two months after the initial suspension--raising serious issues about the sufficiency of the due process the regulations provide.
Under the section 36 regulations, accountants can lose entirely the right to "perform independent audit and attestation services ... for insured national banks". The agency can choose lesser penalties, such as suspension.
The new regulations authorize the agencies to discipline not only individual accountants, but entire accounting firms. The regulations list non-exclusive considerations governing when it is appropriate to discipline an entire firm; these considerations leave regulators great flexibility in making this decision.
The regulations also provide that "good cause" can be based on accountant conduct in connection with audits of companies that are not banks or thrifts. This provision raises questions about the breadth of the jurisdiction of financial institution regulators, it also raises practical questions about how a financial institution regulator will make a record of conduct, and make determinations about accounting issues, outside of the industry that it regulates.
Andrew J. Morris is a partner in the Washington, D.C. office of Mayer, Brown, Rowe & Maw where be focuses his practice on complex transactions and business torts in the areas of securities, accountant liability, corporate governance and securities and consumer class actions.
Caroline E. Brown is an associate in the Washington, D.C. office of Mayer, Brown, Rowe & Maw where she focuses her practice in appellate and general litigation.
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|Title Annotation:||Required reading|
|Author:||Morris, Andrew J.; Brown, Caroline E.|
|Date:||Sep 1, 2004|
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