Part 10- Corporations, Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals, Doc 7

Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals History of Post-Period Bookings The passage discusses the case of Scansaroli and Natelli, where an accounting professional (Scansaroli) faced legal consequences for his role in booking unbilled sales after the fiscal period had ended, which altered the financial statements. These actions were considered unethical and contrary to standard accounting practices. The legal issue revolved around whether Scansaroli could claim he was merely following instructions from his superior, Natelli. Ultimately, the court found Natelli, who made the decision to book the unbilled sales, guilty, but Scansaroli's conviction was partly reversed because he had not made independent judgments regarding the questionable transactions. Mail Fraud and Criminal Liability Professionals, including auditors and consultants, may face criminal liability under various statutes, particularly the mail fraud statute, which prohibits the use of the mails to commit fraud. Similarly, fraudulent statements to government personnel or in loan applications can also lead to criminal charges. The Racketeer Influenced and Corrupt Organizations Act (RICO) targets professionals involved in a pattern of illegal activity, such as fraud or bribery, over a ten-year period. Tax Law Violations In addition to general criminal laws, tax law imposes penalties on professionals for violations like failing to file returns, fraud, or promoting abusive tax shelters. The penalties can range from minor fines to significant prison sentences, depending on the severity of the violation. SEC Administrative Proceedings The Securities and Exchange Commission (SEC) has authority to discipline professionals, including accountants, for violations of securities laws. Under Rule 102(e), the SEC can bar professionals from practicing before it for failing to meet required professional standards, such as issuing financial statements that do not comply with Generally Accepted Accounting Principles (GAAP). Severe penalties, including suspension or revocation of the ability to practice accounting, can result from such violations. Sarbanes–Oxley Act (SOX) SOX imposes significant duties on auditors, particularly regarding the internal control over financial reporting. Section 404 of SOX requires management to assess and report on the effectiveness of its internal controls, with auditors attesting to this assessment. Auditors are also required to notify the client and, in some cases, the SEC if they discover illegal acts during an audit that affect the financial statements. Section 10A of SOX mandates that auditors report illegal acts to management, and if not rectified, to the board and the SEC. Ownership of Working Papers During an audit, accountants create working papers that contain the evidence supporting their audit conclusions. These working papers generally remain the property of the accountant, but the client has access to them. However, the professional may be required to disclose these papers if subpoenaed, particularly in federal tax or SEC investigations. The Sarbanes–Oxley Act mandates that audit working papers be retained for seven years to prevent the destruction of evidence. Professional–Client Privilege Unlike attorneys, accountants generally do not have an inherent client privilege. However, some states have enacted laws that grant a limited privilege to accountants regarding confidentiality. In federal matters, particularly tax and securities law investigations, this privilege does not apply, and accountants may be compelled to testify or produce documents. The Andersen Case and Evidence Destruction The case of Arthur Andersen LLP v. United States (2005) illustrates the consequences of destroying evidence. Andersen instructed its employees to shred documents related to its audit of Enron during an investigation of potential fraud. The Supreme Court ruled that Andersen could not be convicted for destroying evidence unless it was proven that the firm intended to obstruct the criminal investigation. Summary of Key Legal Issues: 1. Accountability of Auditors: Auditors cannot ignore their duty to disclose fraud or misleading financial information, even when under the direction of a superior. 2. Professional Liability: Professionals, including auditors and consultants, can face criminal liability under statutes like mail fraud, RICO, and tax law violations. 3. SEC Enforcement: The SEC has the power to discipline professionals for failing to meet legal and professional standards, with severe penalties including disbarment and civil fines. 4. Sarbanes–Oxley Act: SOX imposes rigorous internal control and reporting requirements on auditors, making them accountable for detecting illegal acts during audits and reporting them to appropriate authorities. 5. Document Retention: The Sarbanes–Oxley Act mandates the retention of audit working papers for seven years, with severe penalties for violations, including imprisonment. 6. Client Privilege: There is generally no accountant–client privilege in federal law, especially in tax or securities matters, but state laws may provide limited protections. This chapter highlights the legal and ethical responsibilities auditors and other professionals hold, emphasizing transparency, due diligence, and accountability in their work to safeguard public trust.