We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls. See here, here and here. That effort shows no signs of waning. As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries. On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures. And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures.
In recent months, issues related to internal control systems and reporting have taken on an increased profile and significance. For example, as previously noted by the authors here and here, the SEC has sought to prioritize compliance with internal controls by initiating a growing number of investigations into companies based on allegations of inadequate internal controls.
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:
- 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. READ MORE