Magazine article The CPA Journal

A Conversation with George Diacont-Chief Accountant, SEC Enforcement Division

Magazine article The CPA Journal

A Conversation with George Diacont-Chief Accountant, SEC Enforcement Division

Article excerpt

I have been with the SEC since 1973. I started in the division of enforcement conducting investigations of financial statement fraud, including the work of independent public accountants. After five years I transferred to the office of chief accountant where I was primarily responsible for conducting independent reviews of enforcement recommendations, particularly those involving accountants. In 1992, I returned to the division of enforcement as its chief accountant. My current role is to oversee the investigation of alleged financial statement fraud. At any one point in time we have about 100 cases under investigation in Washington. The regional offices also investigate allegations of fraud, the number of which can run in the 300rds. I have a staff of 21 accountants, all of whom are fairly sophisticated and knowledgeable, most of whom have spent time in public accounting at large firms.

Whenever we investigate an allegation of financial statement fraud, invariably we investigate the work done by the independent public accountant. It is a high priority with us.

Soon after it was founded, the SEC decided to rely primarily on the private sector to develop accounting and auditing standards and to audit public companies. That decision made it especially important that the enforcement division maintain a close watch over what the profession was doing to ensure that private-sector responsibilities were met in a manner consistent with the public interest. The SEC always maintained that it had implicit authority to set auditing standards, and in the event the private sector fell down on the job, it could step in to fill in any gap. The SEC also has explicit authority to establish accounting principles, but it again decided, largely, to keep that process in the private sector.

It should be noted however, that Title III of the Securities Litigation Reform Act of 1995 explicitly gives the SEC the authority to establish generally accepted auditing standards for audits of public companies. But I don't see any change in policy forthcoming to exercise that authority as long as the private sector does a good job.

Our investigations often begin as a result of information provided by informants (sometimes at the registrant); through information provided by other Federal agencies such as the FBI, IRS, or Comptroller of the Currency; the financial press; or other divisions of the SEC, such as the Division of Corporation Finance.

Typically these actions are brought against accountants under rule 102 (e) of the Commission's Rules of Practice under which we allege the auditor engaged in improper and unprofessional conduct.

The Commission interprets this to mean a failure to comply with generally accepted auditing standards.

The kinds of deficiencies we note are a lack of independence, professional skepticism, an overreliance on management representation, or a failure to obtain sufficient competent evidential matter. The new auditing standard should help, because the proposal says that if the risk of fraud is present, the auditor must become more aggressive and more focused in the application of audit procedures. By more aggressive, I mean the auditor must act in a more challenging way. For example, if there is a concern about the risk of fraud, the auditor should not tell management the inventory locations he or she plans to observe. And you can't send a staff person just out of school to do the observation without proper supervision and review. And you can't rely solely on written confirmations. Our experience shows that where fraud has been present, the confirmation process has been completely subverted by management. The auditor must act aggressively and anticipate and be prepared to deal with objections from the client. Our experience shows that auditors who get in trouble with us are often those who fail to react as required by auditing standards to the changing circumstances that face them. …

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