EIGHTEEN SAFEGUARDS TO AN AUDIT COMMITTEE’S INVESTIGATION OF FINANCIAL REPORTING
As the financial crisis recedes into history, the SEC has renewed its focus on fraudulent financial reporting. It has created a new Financial Reporting and Audit Task Force with enhanced capabilities to seek out and uncover improper accounting, and it has made clear its determination to bring enhanced resources to accounting investigations.
Any audit committee that has been through one knows that an internal investigation of a company’s accounting can be a source of great frustration. Often, accounting investigations seem to take too long, cost too much and leave the company in legal limbo – or, worse, legal freefall – for way too long. Sometimes, those in charge seem to have lost sight of the fact that the objective of the investigation is to fulfil a practical business need.
Nonetheless, attempts at shortcuts have rarely seemed to work out. And both the SEC and independent auditors of financial statements have proved to be exacting audiences for audit committee investigative reports.
For its part, the SEC has made clear its frustration with audit committee investigations lacking in thoroughness and objectivity. Alarming to many audit committees, the SEC has pursued enforcement actions against audit committee members who, faced with potential evidence of fraud, in the SEC staff’s view did not sufficiently fulfil their ‘gatekeeper’ responsibility.
As to the independent auditor, in addition to the requirements of professional standards, an amendment to the US Securities Exchange Act of 1934 calls upon the auditor to evaluate whether a company encountering illegal acts materially affecting the company’s financial statements is taking “timely and appropriate remedial actions”. If the auditor determines the company is not, the auditor may have to provide a report to that effect to the company’s board of directors, which then has 24 hours to inform the SEC. Failure of the board to do so may require the auditor, within 24 hours thereafter, to notify the SEC itself.
Oct-Dec 2015 Issue
Willkie Farr & Gallagher LLP