PCAOB Issues Its First Cooperation Policy Statement

by Orrick - Securities Litigation and Regulatory Enforcement Group
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On April 24, 2013, the Public Company Accounting Oversight Board issued its inaugural “Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations.” The Policy Statement reiterates many of the themes of the SEC’s “Seaboard Report,” and therefore many may view it as largely plowing over well-trodden ground. But, the Policy Statement merits close attention, because it is the first such statement the Board has issued since it was formed, it sets forth specific examples of conduct that is likely to earn credit for cooperation, and it focuses specifically on the auditing profession.

The Policy Statement identifies three forms of “extraordinary” cooperation that could result in audit firms and/or individuals receiving credit in enforcement investigations:

  • self-reporting;
  • remedial or corrective action; and
  • substantial assistance.

According to the Board, “[a] firm or associated person may earn credit for self-reporting by making voluntary, timely and full disclosure of the facts relating to violations before the conduct comes to the attention of the Board or another regulator.” And, the sooner self-reporting is made, the more likely it will result in credit. The Board stressed, however, that self-reporting is “not eligible for cooperation credit” if it is “required by legal or regulatory obligations,” e.g., the auditor’s obligation under Section 10A of the Securities Exchange Act of 1934 to report a client’s illegal acts.

Remedial or corrective actions refer to “voluntary, timely and meaningful actions designed to reduce the likelihood and risk that similar violations will recur, as well as actions to correct violative conduct.” The Board gave several concrete examples of audit firm actions that might yield cooperation credit:

  • “promptly and voluntarily modifying and improving … quality controls or other internal policies and procedures to prevent recurrence of the violative conduct”;
  • “re-assigning or limiting the activities of those individuals responsible for violations,” including both audit team members and “persons in firm management”;
  • “terminating or imposing discipline upon the responsible individuals” in appropriate cases;
  • “promptly notifying [the] audit client or its audit committee (as appropriate) of the violative conduct and cooperating with the client”;
  • “appropriately compensating those adversely affected by the firm’s violations.”

Finally, substantial assistance includes “timely and voluntarily providing information or documents that might not have been discovered absent that cooperation, or beyond that sought by the Board’s staff via accounting board demands and requests, and beyond what is required pursuant to legal and regulatory reporting requirements.” Examples include:

  • “conducting a timely, thorough, objective and competent internal investigation into the violative conduct when it was discovered, and informing the [Enforcement] Division’s staff of the pertinent facts discovered in the internal investigation”; and
  • “substantially assist[ing] another law enforcement authority’s [e.g., the SEC’s] investigative processes by self-reporting to that authority, or providing it with the facts discovered in an internal investigation.”

The Board did not state one way or the other whether disclosure of privileged information would result in either a greater chance of receiving credit for cooperation or receiving greater credit (e.g., no sanction as opposed to a lower sanction).

It is of some comfort that the Board has joined the Commission in going on the public record that providing cooperation may result in reduced or even no charges or sanctions. But, as always, the proof of the pudding will be in the tasting. At both the Commission and the Board, the specific instances in which the regulators have given credit for cooperation have been few and far between. And, in many of those instances, it is unclear exactly how much credit the company, firm or person received for cooperating. This is perhaps because, as the Board frankly noted in the Policy Statement, there is “some tension” between “encouraging (and crediting) extraordinary cooperation” and in holding entities and individuals “fully accountable for their violative conduct.” But, to the extent the regulators want to regularly receive the kind of “extraordinary” cooperation they seek, they need to make clear through actions as well as words that such cooperation will in fact be rewarded – tangibly and meaningfully.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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