July, 2003
SEC Issues New Rule on Improper Influence on Conduct of Audits
The SEC has issued a new rule prohibiting directors, officers of an issuer and any persons acting at the direction of such persons from taking any action to coerce, manipulate, mislead or fraudulently influence any accountant engaged in an audit or review of the financial statements of the issuer that are required to be filed with the SEC, if that person knew or should have known that such action, if successful, could result in rendering the issuer's financial statements materially misleading. Rule 13b2-2(b) took effect June 27, 2003. It was adopted to implement Section 303(a) of the Sarbanes-Oxley Act of 2002.
Individuals covered by the rule include the issuer's directors, president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any person routinely performing corresponding functions and any person acting under the direction of any of these persons. Officers of subsidiaries may also be subject to the rule, where appropriate. Individuals acting under the direction of a director or officer may include lower level employees of the issuer, partners or other employees of the accounting firm, attorneys, securities professionals and other advisors to the issuer who try to influence the issuer's auditors. Third parties who, under the direction of an issuer's officers and directors, mislead or improperly influence auditors are subject to sanction by the SEC if they know or should have known that their conduct could result in investors being provided with misleading financial statements. Thus, third parties do not have to intend to mislead the auditors.
Rule 13b2-2(b)(2) includes a list of some of the actions that the SEC believes could, if successful, render the issuer's financial statements materially misleading. These include actions taken to coerce, manipulate, mislead or fraudulently induce an auditor:
- to issue or reissue a report on an issuer's financial statements that is not warranted in the circumstances;
- not to perform audit, review or other procedures required by generally accepted auditing standards or professional standards;
- not to withdraw an issued report; or
- not to communicate matters to an issuer's audit committee.
While the rule itself does not list examples of the types of conduct that the SEC believes may violate the rule, Release 34-47890 does contain some examples. These include:
- offering or paying bribes or other financial incentives, including offering future employment or contracts for non-audit services;
- providing an auditor with an inaccurate or misleading legal analysis;
- threatening to cancel or canceling existing non-audit or audit engagements if the auditor objects to an issuer's accounting;
- blackmailing; and
- making physical threats.