The SEC's changing approach to enforcement

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15 Nov 2002

While he did not address International Accounting Standards directly, SEC Enforcement Division Director Stephen M.

Cutler's recent Remarks at the University of Michigan Law School address (among other things) accounting fraud, transformation of the accounting profession, and regulatory responses. An excerpt:

Perhaps also inhibiting the Commission's effectiveness at deterring financial fraud, particularly by gatekeepers, is its historical reluctance to sue accounting firms and attorneys. Through the exercise of its prosecutorial discretion, the Commission generally has reserved suing both groups for only the most egregious cases. In the case of accounting firms, the rationale generally has been that it is unreasonable to expect a firm to control the actions of thousands of employees conducting audits nationwide. Instead, in the typical case involving wrongdoing by a single accountant, the Commission has pursued only the individual. This practice stands in contrast to the Commission's approach to similar fact patterns at regulated entities, like broker-dealers. For instance, when the Commission charges an individual broker for a securities violation, it is not uncommon to also charge the firm with which the broker is associated. This reluctance to charge accounting firms, as well as attorneys, may have had the unintended consequence of holding both groups to a lower standard rather than to the high standard their special roles demand....

Today, of course, it's a whole new ballgame.

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