Prove It

The SEC's new policy is to target audit firms, not only individual accountants.

As if the ex­Andersen partners in its midst weren’t enough of a reminder of the accounting profession’s woes, the audience at a recent conference of the American Institute of Certified Public Accountants got a stiff warning that the Securities and Exchange Commission will no longer be content to just target individual accountants for botched audits.

Director of enforcement Stephen M. Cutler warned the crowd that the SEC’s new policy would target audit firms too, “no matter how improper the individual auditor’s conduct.”

Cutler began his speech by joking that the conference was a more pleasant way to address accountants than litigation releases, but by the end, many in the audience felt they had been ambushed. Chuck Landes, the AICPA’s director of auditing standards, said he took Cutler’s remarks to mean the SEC “is going to presume firms are guilty unless they prove otherwise.”

Indeed, to avoid a suit, Cutler explained, a firm must prove it is self-policing by reporting the misconduct and taking immediate steps to prevent recurrence. It must also cooperate fully with law enforcement.

And what does this added liability mean for corporate audit fees? Chances are, they’re going up.

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