Securities:Strengthening the roles of gatekeepers to the offering process
Status:
A task force of the AICPA Center for Public Company Audit Firms issued a " White Paper " on auditor participation in the due-diligence process on August 23, 2005. SIA criticized the group’s recommendations in a written response dated October 6, 2005. Despite a frank exchange of views at an October 13 meeting with the AICPA, SIA submitted an additional letter to SEC staff expressing the belief that the draft white paper should be set aside. On October 28, 2005, SIA, TBMA and AICPA announced they have initiated further discussions on the issue. It is expected that these discussions will also involve other interested parties, including investors, issuers and regulators. In connection with these discussions, the AICPA stated that the prior discussion draft on this subject (referred to informally as " White Paper II " ) has been put aside in favor of a " clean sheet of paper. " In the meantime, the AICPA expects professional practices in this area will continue to be dealt with on a firm-by-firm basis. For further information contact:
Background:
The Center for Public Company Audit Firms – a division of the AICPA – issued a second draft white paper (White Paper II) that further diminishes the auditor’s role in the due-diligence process regarding financial statements provided to an underwriter as part of the underwriter’s " reasonable investigation " in the course of an offering. For example, the draft white paper proposes that accountants should not comment to those performing the due diligence process on:
- Any awareness of illegal acts or fraud;
- Matters requiring a qualitative assessment such as the degree of aggressiveness or conservatism of the company’s accounting policies;
- Matters requiring a subjective assessment such as the competence of the CFO or controller or the adequacy of internal audit functions; or
- Any management responses to due diligence inquiries that the independent auditor thinks are inaccurate.
The AICPA is soliciting input to its draft white paper from major law firms, bar groups and trade associations, and will likely issue its white paper later this fall. The draft white paper has troubling implications for the role of accountants in the capital-raising process and the quality of due diligence in the future.
Position:
SIFMA strongly opposes proposals contained in an American Institute of Certified Public Accountants (AICPA) draft white paper that would effectively end auditor participation in the so-called " due-diligence " process, thus seriously jeopardizing investor protection.
Policy Points:
- The integrity, reliability, and efficiency of the due-diligence process are key components of investor protection. SIA believes White Paper II jeopardizes the interests of investors, directors, and issuers by potentially weakening financial disclosure.
- The AICPA has excluded from the decision-making process the very group affected the most – retail and institutional investors – as well as other essential groups, such as issuers and their directors.
- The AICPA has no legal authority to regulate auditor conduct. Under the Sarbanes Oxley Act, that authority rests exclusively with the Public Company Accounting Oversight Board under the supervision of the Securities and Exchange Commission.
- White Paper II fails to take into account that auditor’s participation in the due-diligence process is undertaken at the request and with the consent of the issuer and agreement by the auditor.
Updates:
SIA/BMA Letter to SEC Re: Auditors Due Diligence - Positions Taken by the AICPA at Oct. 11 Meeting Confirm That White Paper II Must be Publicly Repudiated - pdf 5.0, October 13