WASHINGTON — The Securities and Exchange Commission in the US, while continuing to prosecute individual auditors who abet corporate fraud, also should take action against accounting firms themselves, the agency's top enforcement official told the besieged industry on Thursday.
The SEC needs to shift its approach and hold accounting firms responsible for audit failures by their partners — even when the firms' senior managers weren't involved, SEC Enforcement Director Stephen Cutler said in a speech to the industry's trade and lobbying group.
That raises the possibility of new SEC civil lawsuits against accounting firms in cases of companies that mislead investors with inaccurate financial results.
“You can count on your fingers the number of times that the [SEC] has sued” a major accounting firm in the last quarter century for an audit failure caused by its partners, even though the agency has the legal authority to do so, Cutler said.
It's time for the agency to “recalibrate its enforcement approach when it comes to audit firms,” he said.
Some may argue, he acknowledged, that it is unreasonable to expect a big accounting firm to control thousands of employees engaging in audits of companies around the globe.
“But why should an accounting firm be allowed to routinely disassociate itself from the actions of its partners?” Cutler asked.
Cutler's shot across the bow targeted an industry shaken by a year of accounting scandals at major U.S. firms and the criminal conviction of accounting giant Arthur Andersen for destroying audit documents of Enron Corp.
Faced with the prospect of SEC enforcement actions, Cutler said, “It is my hope that accounting firms will take an even greater role in ensuring that individual auditors are properly discharging their special and critical gate-keeping role.”
In the meantime, Cutler told the American Institute of Certified Public Accountants that the SEC will continue to aggressively pursue misconduct by individual auditors.
“I think I can safely say that you should expect more of the same in the near future,” he said.
It wasn't clear whether President Bush's nominee to chair the SEC, investment banker William H. Donaldson, would embrace Cutler's proposal.