Auditors of financial institutions have been on the receiving end of enforcement claims since the late 1980s, but recent actions by bank regulators demonstrate the agencies' increased powers.
For example the Office of the Comptroller of the Currency is seeking a $300,000 fine from the outside auditors of the failed First National Bank of Keystone, W.Va., as well as affirmative corrective action. The FDIC, as the receiver for the bank, is also suing them for up to $187 million in losses allegedly arising out of the bank's failure.
The enforcement tools of the federal banking agencies under section 8 of the Federal Deposit Insurance Act empower the agencies to remove or prohibit an "institution-affiliated party," including an "independent" accountant, from further participation in the affairs of an insured depository institution.
In December 1991 section 36 of the Federal Deposit Insurance Act was added to provide federal bank regulators with enhanced and supplemental "death penalty" authority to remove, suspend, or bar an accountant from performing audit services for insured depository institutions with total assets of $500 million or more.
The agencies amended their rules in August 2003 to be consistent with this new authority and in some ways created broader responsibilities for accountants than those created by the SEC or the Public Company Accounting Oversight Board.
To prepare for potential actions by the agencies, accounting firms that audit depository institutions should consider the following issues:
- Adequate policies, oversight, and checks and balances so that the transgressions of one rogue employee do not affect the standing or liability of others in the firm, or the firm itself.
- Since an accounting firm's franchise to audit banks may be affected by unrelated or collateral actions against an individual accountant or the firm that have nothing to do with a banking client, standards must be equally rigorous throughout the practice.
- Standards, such as those established and enforced by other accounting regulatory organizations, will be relied upon and incorporated into the banking agencies' repertoire and therefore may be applicable in a broader context than might otherwise have been apparent.
GOOD CAUSE
Under the regulations, the agencies have "good cause" to act against an accountant who lacks the qualifications to perform audit services. Those who engage in knowing or reckless conduct that results in a violation of applicable professional standards may be removed, suspended, or barred from a banking practice.
Professional standards and conflict-of-interest provisions applicable to accountants through the Sarbanes-Oxley Act of 2002 and those developed by the Public Company Accounting Oversight Board and the SEC are relevant standards which the agencies will rely upon and use.
Therefore, the impact of the Oversight Board's rules, which apply under Sarbanes-Oxley only to auditors of public companies registered with the SEC, may be broader in the banking context, as the agencies may apply them, for example, to privately held institutions.
Conduct which gives rise to "good cause" for agency action need not occur in connection with the provision of audit or other services provided to depository institutions. Any actions or failures to act that meet the criteria set forth in the regulation, whether or not related to the banking industry, may constitute "good cause."
If an agency finds good cause to remove, suspend, or debar a member or an employee of an accounting firm, it may do the same to the firm or one or more of its offices. The agencies have concluded there is no indication that Congress intended "independent public accountant" to limit removals, suspensions, or debarments solely to individuals.
A removed, suspended, or debarred "independent public accountant or accounting firm" may request reinstatement at any time by the agency that issued the order. There is no waiting period, as was suggested in the proposed rules. But the agencies have noted that it will be unusual for them to grant such relief within one year.
REMOVAL PROCEEDINGS
The agencies will hold formal hearings on removals, suspensions, and debarments under their uniform rules of practice and procedure applicable to most enforcement actions. But by virtue of the authority in section 36, an agency could also immediately suspend an independent public accountant or his or her firm.
The agency would base the move on findings that it was necessary for the protection of an insured depository institution, its depositors, or the insured depository system.
This severe step will probably be used only in egregious cases. But it may be taken when the agencies believe that it is necessary to prevent seriously harmful conduct from being repeated or escalating while the administrative proceedings relating to a permanent removal, suspension, or debarment are pending.
Immediate suspensions will probably cause irreparable disruption to an institution as well as an accountant and may make it difficult for the institution to meet the deadlines for obtaining annual audits. Accordingly, any institution whose accountant has received an immediate suspension should ensure that the agency adjusts its filing deadlines accordingly.
AUTOMATIC REMOVAL
Accountants subject to certain specified disciplinary actions would automatically be prohibited from providing audit services. The actions giving rise to such an automatic bar include:
- A final order of removal, suspension, or debarment under section 36 (other than a limited-scope order) issued by any of the other agencies.
- Certain actions by the Public Company Accounting Oversight Board (specifically, a temporary suspension or permanent revocation of registration or a temporary or permanent suspension or debarment from further association with a registered public accounting firm).
- Certain actions by the SEC (specifically, an order of suspension or a denial of the privilege of appearing or practicing before it).
- Suspension or debarment for cause from practice as an accountant by the licensing authority of any state, possession, commonwealth, or the District of Columbia. The automatic-bar provisions differ from the SEC's practice.
An accountant or a firm against which multiple agencies take disciplinary action under section 36 may be entitled to separate hearings before each agency, notwithstanding the similarity of the issues. That would essentially result in duplicative proceedings to implement a single action.
The automatic bar resulting from an action by another agency does not apply if the other agency has issued a limited-scope order effective only with respect to audit services provided to one or more specified institutions. If another agency sought to remove, suspend, or debar an accountant subject to a limited-scope order, it would have to provide the accountant with the hearings and procedures set forth in the rule.
An agency can override a automatic industrywide bar with respect to the institutions it supervises. An accountant or firm would be entitled to make such a request in any case.
The agencies recognize SEC and Public Company Accounting Oversight Board expertise and jurisdiction in this area and therefore may view their actions against an accountant or firm as a predicate for an automatic bar. Though there are differences between insured depository institutions and institutions under the primary jurisdiction of the SEC, conduct giving rise to SEC or Oversight Board suspensions or debarments is likely to be of equally significant concern to the agencies.
When an SEC or Oversight Board action is based on conduct unrelated to the provision of audit services to an insured institution, however, the agencies retain override authority.
Suspension or debarment of an accountant for cause by a state licensing will be treated as grounds for discretionary agency removal, suspension, or debarment but not as a trigger for the automatic prohibition on the provision of audit services.
That is because there are likely to be instances in which a state's action is not relevant to the provision of audit services, and there may be a wide range of "for cause" grounds for suspension or debarment under various state laws.
Bank auditors should be aware of the risks under the new banking regulations and plan accordingly.
