Financial Regulators Adopt New Ground to Discipline Accountants

By Morris, Andrew J.; Brown, Caroline E. | Business Credit, September 2004 | Go to article overview

Financial Regulators Adopt New Ground to Discipline Accountants


Morris, Andrew J., Brown, Caroline E., Business Credit


The Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Company and the Office of Thrift Supervision recently published final rules that create a new basis for enforcement action against accountants. The new regulations, entitled "Removal, Suspension, and Department of Accountants From Performing Audit Services," implement section 36 of the Federal Deposit Insurance Act of 1991, which authorizes the Agencies to remove, suspend and debar accountants for "good cause".

The federal financial regulators already have two other bases for disciplining accountants: the "institution affiliated party" provision of Financial Institutions Regulatory Reform Recovery and Enforcement Act for "knowing or reckless" misconduct, and discipline for "incompetence" or "disreputable" conduct. In addition, the Securities and Exchange Commission long has had the authority to discipline accountants who work on documents filed with it. In 2002, the Sarbanes-Oxley Act created the Public Accounting Oversight Board, which now is charged with primary responsibility for regulating accountants who audit public companies. The SEC, however, lost none of its authority.

Defining "Good Cause"

The new regulations contain a number of significant provisions. The first is the definition of "good cause". The regulations give it an expansive reading, which include not only "knowing or reckless" violations of professional standards, but also conduct that is merely "negligent". This us of negligence as a basis for enforcement action raises a number of issues; all important one is whether the regulation requires gross negligence, as do certain parallel provisions for accountant discipline, or whether ordinary negligence will suffice. The regulations leave this question open. The negligence standard also raises questions about how the "good cause" standard relates to standards for enforcement action by other regulators.

"Immediate Suspension"

The new regulations authorize regulators to impose "immediate suspension" on accountants, based only on a "reasonable basis to believe" that the accountant "has engaged in conduct" that constitutes "good cause". In "immediate suspension" matters, typical administrative procedures do not apply. …

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