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CAQ Urges SEC to Completely Exclude Outside Auditors from Dodd-Frank Whistleblower Awards

By Jim Hamilton

The Center for Audit Quality has asked the SEC to exclude independent auditors from whistleblower awards when their reporting is based on information about the performance of services by the audit firm related to an audit engagement required under the securities laws. Absent a specific exclusion, noted CAQ in a letter to the SEC, the proposed whistleblower rules may inadvertently encourage outside auditors to disregard their duties of confidentiality and create conflicts of interest through the prospect of individual financial gain, thereby discouraging the candor and values critical to an effective audit of a company?s financial statements.

There are already numerous incentives and means for an independent auditor to report on and address potential securities law violations with respect to their firms? performance of an engagement required under the securities laws. For example, PCAOB Interpretation 102-4 under Rule 102 specifically prescribes the means by which disagreements in the course of an audit should be addressed. Essentially this interpretation sets forth an internal reporting up process. In addition, PCAOB Rule 3502 specifically deals with illegal conduct in the course of an audit by requiring an auditor to act upon knowledge of potential securities law violations. The PCAOB also performs regular inspections of registered public accounting firms.

In addition, the firms themselves have methods, including internal reporting processes that include whistleblower hotlines and other channels, to address potential violations of firm policies, professional standards, regulatory requirements and the securities laws. The concerns relating to an employee bypassing a company?s internal reporting processes apply equally to an independent auditor?s bypassing the firm?s internal reporting processes. Further, if auditors fear that others in the firm may bypass the usual processes by which issues are identified, discussed and resolved, candor within the audit process might be chilled.

On a related matter, CAQ supports the exclusion from the proposed rules of whistleblower awards to independent auditors who report information about a company obtained through the performance of an audit engagement required under the securities laws. CAQ asks the SEC to expand the exclusion to whistleblower awards to independent public accountants for information gained through the performance of all engagements, such as permitted non-audit services, for the same company for which the auditor also performs an audit engagement.

The CAQ believes that permitting awards to independent public accountants for such information in either scenario above would undermine a certified public accountant?s duties of confidentiality and integrity and other ethical obligations, as well as undermine the candor among independent auditors, the company and the audit committee

In CAQ?s view, the potential harm to the accountant?s relationship with a company and its audit committee, the audit process, and audit firm internal control systems that could result if independent public accountants are permitted to benefit financially through whistleblower reporting strongly outweighs any potential incremental benefit to allowing such awards.

More broadly, and fearing an adverse impact on company compliance programs, CAQ urged the SEC to require concurrent whistleblower reporting to the company and the Commission as a condition for an award. A failure or delay in the communication of whistleblower reports of potential securities violations to the company may reduce the ability of the company and its independent auditor to rely on the efficacy of the company?s internal control systems and could adversely impact management and the auditor?s evaluations of internal control over financial reporting under Sarbanes-Oxley sections 404(a) (management?s assessment of effectiveness of internal controls) and 404(b) (auditor?s attestation).

Full post as published by Jim Hamilton's World of Securities Regulation on January 04, 2011 (boomark / email).