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Panelists Discuss the SEC and the Accounting Profession

Christian Mixter, with Morgan, Lewis & Bockius LLP, David Bergers, with the SEC's Boston Regional Office, and Walter Ricciardi, the deputy director in the SEC's Enforcement Division, discussed the SEC and the accounting profession at ALI-ABA's recent program on accountants' liability. Ricciardi said the SEC has approximately 130 stock option backdating cases under investigation and in each case asks where the auditors were. In many cases, the auditors were intentionally misled, he said.

Berger said that in every fraud case there are certain elements such as management incentive or pressure, opportunity, lack of controls and rationalizing the conduct. The SEC is seeing a lot of self-reporting, he said, although sometimes the day before a restatement is announced.

Mixter responded to questions about the lack of auditor 10A reports and said the small number shows it is working, but not in the way imagined. Many expected to see audit letters, but instead, auditors are going to the issuers and the issuers are investigating the possible illegal act to prevent the issuance of a letter. Ricciardi added that he was not surprised at all to see so few 10A letters. Auditors have so much leverage, he said, "if you force your auditor to write that letter, you're crazy." The SEC receives about one a year.

Ricciardi said the staff also looks at the activities of nonmanagement directors in a fraud investigation to determine where they were and what they knew. The staff is not targeting directors, he said, but will follow the leads to see if there was recklessness or a lack of good faith. There are not many cases involving directors, but the staff is looking at some in the options backdating investigations, he said.

Mixter predicted that, going forward, document retention and global issues will be a focus of the SEC. Ricciardi agreed that there may be more investigations involving auditors outside the U.S. These cases aren't easy because of jurisdictional issues, he said, but the SEC will go after them.