That change particularly benefits the accountant because it’s very, very hard to plead at the outset of a case of facts that give rise to a “strong inference of fraud” that a secondary participant like the accountant participated in some possible misconduct.
I think it was long overdue. But it means it’s no longer attractive tosue accountants because even if you’re successful you’re only going to get a portion of the total liability assessed against them, and that may not justify the cost. And plaintiffs’ lawyers will tell you they think about that a great deal.
Third, during the ’90s, litigation against accountants was shifting from federal courts to state courts because it was easy to sue on common law and negligence theories in state court.
However, the passage of the Uniform Standards Act in 1998 has meant that all of those suits in state court and all of those causes of action, whether they’re asserted in state court or federal court, are now preempted and now gone, and the accountants have immunity to that extent.
Yes, I understand that the SEC can sue, but private litigation involving aiding and abetting is gone. Now, what does this all mean on balance? I would generalize it this way:
Suits involving accounting irregularities are very common. Indeed, they may have increased since the passage ofthe ’95 Act, but those suits today rarely involve the accountant, the outside accountant, as a defendant, and when they do they’re often very easily and quickly dismissed.
It is not attractive to sue accountants. I’m not saying that it should be attractive to sue accountants. What I’m focusing on is the margin between the benefits and the cost, and today the accountant, as gatekeeper, faces greatly increased benefits through the existence of non-audit advisory services that are subject to the discretion of management, and it faces greatly reduced liabilities for the reasons I’ve just said.
Now, there’s very little that the SEC can do about this reduction in liabilities, and I’m not suggesting that liabilities should always be maximized. But I’m suggesting that as the costs have gone down and the benefits have gone up the Commission does have to think about alternative regulatory strategies, including prophylactic limits of the kind that have been proposed here.
And these limits rest on two basic justifications. One is that the benefits from deferring to management have greatly increased, and the other is that the nature of these services involve the accountant serving, in my judgment, two www.loansolution.com/payday-loans-ok/ different clients. This was stressed in the Panel on Audit Effectiveness dissenting statements.
They point out that the non-audit advisory servicesare really sold to management; whereas, the audit services are, essentially, for the shareholders and the investors, and there can often be conflicts between what investors want and what management wants.
And when you have two different clients, you may tend to defer to the client who is offering you the larger revenues.
Now, against that backdrop let me turn to my specific comments on Rule 2-01, and all I’m going to focus on is its critical Section 2-01(c)(4). Proposed 2.01(c)(4), essentially, gives you a list of prohibited professional services.
These are services that the auditor per se may not provide without in effect, sacrificing independence. And I’ll call the common theme that links most of these services the self-grading problem; that is, it’s said, I think properly, that an auditor should not be able to review its own work product or its own judgments or its own positions, and, to that extent, certain kinds of activities should not be provided.
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