Corporate & Securities Law

By Jim Hamilton

Expert Testimony Not Needed to Show Accountant Acted Unreasonably

The SEC acted properly in suspending a former audit firm partner from practice before the Commission under Rule 102(e). Gregory Dearlove was the engagement partner in charge of the 2000 audit of Adelphia Communications Corp. The SEC concluded Dearlove engaged repeatedly in unreasonable conduct resulting in violations of applicable accounting principles and standards. According to the District of Columbia Circuit, the SEC made no error of law in imposing the suspension under Rule 102(e) and substantial evidence supported its findings of fact. Dearlove v. SEC.

The D.C. Circuit rejected Dearlove's contention that the SEC had to hold he violated the common law negligence standard of care, as evidenced by expert testimony, in order to find a Rule 102(e) violation. According to the panel, the appropriate standard of care in this case was supplied by
Generally Accepted Auditing Standards, and the SEC did not need expert testimony to establish the standard of care or to determine whether Dearlove?s conduct was unreasonable. The SEC properly found that Dearlove?s conduct was unreasonable in the circumstances and that it resulted in a violation of professional standards, both GAAS and GAAP.

The court also found that the SEC also did not deny due process to Dearlove by denying his request for a postponement of his hearing. The administrative law judge properly considered the request in light of the broad discretion the agency has in ordering the conduct of its proceedings, concluded the court.

Full post as published by Jim Hamilton's World of Securities Regulation on July 29, 2009 (boomark / email).