Securities Compliance Sentinel - Analysis of Cutting Edge Securities Industry Issues

In early December, the PCAOB issued a release indicating that accounting and auditing professionals need to be skeptical regarding their work.

The PCAOB is suggesting that professionals in the accounting and auditing profession must be critical of their oversight responsibilities with their clientele.  Regulators expect them to continue to exercise that skepticism in their judgments as they work through audits and other accounting functions.  If such skepticism is missing, the PCAOB seems to infer that there could be consequences.

Accordingly, PCAOB is watching for this skepticism, auditors and accountants exercise it.

The SEC is extremely concerned about foreign auditors.

In particular, the SEC is worried that those who work in certain European countries and in China are not subject to auditor requirements or the PCAOB.  Essentially, the SEC is concerned over the lack of US oversight over these foreign auditors.  Further, the SEC is concerned about if their audit reports provide accurate information for investors.

Although the SEC has not indicated enforcement action, it is considering if it should instruct the  PCAOB to engage in further regulation of these entities and their issuers.  See http://WWW.SEC.GOV/NEWS/SPEECH/120312LAA.HTM

We have not talked about the Sarbanes-Oxley Act in sometime, so let's jump right in!! 

Interestingly, over the last 10 years since Sarbanes-Oxley became effective, audit costs for public and private companies have increased significantly.  We recently came across a survey published by Financial Executives International, indicating, that these fees increased somewhat over the last 10 years.  Additionally, the vast majority of those polled by the survey did not support the PCAOB’s mandatory audit rotation plan, stating that it would increase costs significantly. 

In reporting troubling results, the survey stated that only 37% of private companies had risk management processes in place.  That means a significant majority of private companies could be at risk.  One wonders if this leads to trouble in the future.

Finally, there was some positive aspects of the survey.  The report found that those companies with centralized operations on both the public and private level saved money in audit fees as opposed to those who had decentralized operations. 

The SEC Enforcement Division’s chief accountant has gone on record as saying that, in every SEC accounting case, the SEC Staff reviews auditor conduct. 

The chief accountant stated that the SEC Staff looks at improper revenue recognition; understated expenses; financial crisis related accounting issues regarding loans and securities; as well as cross-boarder issues.  These reviews are done in conjunction with the PCAOB, and said auditor reviews are ongoing.  

This is not new news or should not come as a shock to anyone.  The SEC is always looking at the potential for bringing an auditor into an action when there is an investigation of any form of financial fraud.  As a result, auditors should respond carefully to any SEC inquiry.

Late last week, one of my colleagues sent me an e-mail where he copied 8 other people, half of them I could not identify if my life depended upon it.  I then heard about the person who had a Twitter account with over 17,000 follwers, and was now being sued by his former employer over ownership of the account-- really, does anyone think the person knows 17,000 people?  Firms and persons working in financial services industries generate trillions of e-mails every year, encompassing the mundane to the critical. 

These firms and their employees also seem to be involved in numerous civil, regulatory and criminal investigations and litigations.  Much of the vast amount of money in legal fees paid to defend these firms and their employees (sums that sometimes greatly exceed the GDP of several developing countries) often relate to e-mail review and production.  General counsels and firm management looking for ways to save money on these bills should, initially, read my article that was published in the New Jersey Law Journal, outlining the "CC" problem and ways of clamping down on this terrible plague afflicting our society, http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294970187.

Once read, please do your part in stopping this madness because the dollar you save maybe your own!!

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

Both the SEC and the PCAOB have proposed standards that would amend Exchange Act Rule 17a-5, to require broker-dealers and their auditors to include various schedules and financial reports with their annual audits.

The new requirements would require broker-dealers annual reports to include a financial report, a compliance report or an exemption report exam reviewed by an auditor.  The PCAOB also proposed auditor testing standards for broker-dealers, who do not hold customer funds or securities, provided they meet the conditions for an exemption under Exchange Act Rule 15c3-3.

According to both the SEC and the PCAOB, such standards are needed to provide a level of assurance to regulators. There standards also would –it is believed--avoid any unnecessary expenses or complexity for smaller firms. Both regulators saw the need to improve this oversight given their historical perspective of broker-dealer examinations as well as audit reports derived from examinations of broker-dealers. 

In sum, this trend of financial oversight of broker-dealers will invariably continue over time.