2007 Issue 1 - New York City Bar Association

L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E
Within one business day of receiving an auditor’s report, the Board must
notify the SEC of the problem and provide the auditor with a copy of the
notice given to the SEC. If the auditor does not receive this notice within
the one-day period, then the auditor is required to either (1) “resign from
the engagement,” or (2) provide the Commission with a copy of the report
it prepared. 85 If the auditor chooses to resign, it still must furnish the
SEC with its report. 86
Although Section 10A imposes an escalating reporting requirement
on auditors, it is exceedingly rare that the SEC actually learns of corporate
wrongdoing from the auditor because of a company’s failure to take
remedial action. Rather, the Section 10A reporting-out mechanism exists
as a last resort. When an auditor becomes aware of suspected wrongdoing,
it will often insist that the company conduct an internal investigation,
usually at the direction of the company’s Audit Committee. This
internal review, in turn, can lead to a company’s self-reporting and cooperating
with the government. Given the requirements of Section 10A and
the regulatory expectations in this area, audit firms have used their ability
to withhold or qualify audit opinions to induce companies to conduct
investigations, institute remedial measures, and even to alter management.
In situations where a Section 10A investigation has been undertaken and
evidence of an illegal act has been detected, audit firms often will demand
that any potential problems be examined and resolved before they
are willing to issue their report on the company’s financial statements.
85. Id. at § 78j-1(b)(3).
86. Id. at § 78j-1(b)(4).
2 0 0 7 V O L. 6 2 , N O. 1
225