Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Section l0A -- Audit Requirements

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1. In general
   
   Each audit required pursuant to this title of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission--
   
   
   1. procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;
      
      
   2. procedures designed to identify related party transactions that are material to the financial statements or otherwise require disclosure therein; and
      
      
   3. an evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year.
      
      
2. Required response to audit discoveries
   
   
   1. Investigation and report to management
      
      If, in the course of conducting an audit pursuant to this title to which subsection (a) of this section applies, the registered public accounting firm detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred, the firm shall, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission--
      
      
      1. 1. determine whether it is likely that an illegal act has occurred; and
            
            
         2. if so, determine and consider the possible effect of the illegal act on the financial statements of the issuer, including any contingent monetary effects, such as fines, penalties, and damages; and
            
            
      2. as soon as practicable, inform the appropriate level of the management of the issuer and assure that the audit committee of the issuer, or the board of directors of the issuer in the absence of such a committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of such firm in the course of the audit, unless the illegal act is clearly inconsequential.
         
         
   2. Response to failure to take remedial action
      
      If, after determining that the audit committee of the board of directors of the issuer, or the board of directors of the issuer in the absence of an audit committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of the firm in the course of the audit of such firm, the registered public accounting firm concludes that--
      
      
      1. the illegal act has a material effect on the financial statements of the issuer;
         
         
      2. the senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions with respect to the illegal act; and
         
         
      3. the failure to take remedial action is reasonably expected to warrant departure from a standard report of the auditor, when made, or warrant resignation from the audit engagement;
         
         
      the registered public accounting firm shall, as soon as practicable, directly report its conclusions to the board of directors.
      
      
   3. Notice to Commission; response to failure to notify
      
      An issuer whose board of directors receives a report under paragraph (2) shall inform the Commission by notice not later than 1 business day after the receipt of such report and shall furnish the registered public accounting firm making such report with a copy of the notice furnished to the Commission. If the registered public accounting firm fails to receive a copy of the notice before the expiration of the required 1-business-day period, the registered public accounting firm shall--
      
      
      1. resign from the engagement; or
         
         
      2. furnish to the Commission a copy of its report (or the documentation of any oral report given) not later than 1 business day following such failure to receive notice.
         
         
   4. Report after resignation
      
      If a registered public accounting firm resigns from an engagement under paragraph (3)(A), the firm shall, not later than 1 business day following the failure by the issuer to notify the Commission under paragraph (3), furnish to the Commission a copy of the report of the firm (or the documentation of any oral report given).
      
      
3. Auditor liability limitation
   
   No registered public accounting firm shall be liable in a private action for any finding, conclusion, or statement expressed in a report made pursuant to paragraph (3) or (4) of subsection (b) of this section, including any rule promulgated pursuant thereto.
   
   
4. Civil penalties in cease-and-desist proceedings
   
   If the Commission finds, after notice and opportunity for hearing in a proceeding instituted pursuant to section 21C, that a registered public accounting firm has willfully violated paragraph (3) or (4) of subsection (b) of this section, the Commission may, in addition to entering an order under section 21C, impose a civil penalty against the registered public accounting firm and any other person that the Commission finds was a cause of such violation. The determination to impose a civil penalty and the amount of the penalty shall be governed by the standards set forth in section 21B.
   
   
5. Preservation of existing authority
   
   Except as provided in subsection (d) of this section, nothing in this section shall be held to limit or otherwise affect the authority of the Commission under this title.
   
   
6. Definitions
   
   As used in this section, the term "illegal act" means an act or omission that violates any law, or any rule or regulation having the force of law. As used in this section, the term 'issuer' means an issuer (as defined in section 3), the securities of which are registered under section 12, or that is required to file reports pursuant to section 15(d), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933, and that it has not withdrawn.
   
   
7. Prohibited Activities
   
   Except as provided in subsection (h), it shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appropriate by the Commission) that performs for any issuer any audit required by this title or the rules of the Commission under this title or, beginning 180 days after the date of commencement of the operations of the Public Company Accounting Oversight Board established under section 101 of the Sarbanes-Oxley Act of 2002 (in this section referred to as the 'Board'), the rules of the Board, to provide to that issuer, contemporaneously with the audit, any non-audit service, including--
   
   
   1. bookkeeping or other services related to the accounting records or financial statements of the audit client;
      
      
   2. financial information systems design and implementation;
      
      
   3. appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
      
      
   4. actuarial services;
      
      
   5. internal audit outsourcing services;
      
      
   6. management functions or human resources;
      
      
   7. broker or dealer, investment adviser, or investment banking services;
      
      
   8. legal services and expert services unrelated to the audit; and
      
      
   9. any other service that the Board determines, by regulation, is impermissible.
      
      
8. Preapproval Required for Non-Audit Services
   
   A registered public accounting firm may engage in any non-audit service, including tax services, that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activity is approved in advance by the audit committee of the issuer, in accordance with subsection (i).
   
   
9. Preapproval Requirements
   
   
   1. In general
      
      
      1. Audit committee action
         
         All auditing services (which may entail providing comfort letters in connection with securities underwritings or statutory audits required for insurance companies for purposes of State law) and non-audit services, other than as provided in subparagraph (B), provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer.
         
         
      2. De minimus exception
         
         The preapproval requirement under subparagraph (A) is waived with respect to the provision of non-audit services for an issuer, if--
         
         
         1. the aggregate amount of all such non-audit services provided to the issuer constitutes not more than 5 percent of the total amount of revenues paid by the issuer to its auditor during the fiscal year in which the nonaudit services are provided;
            
            
         2. such services were not recognized by the issuer at the time of the engagement to be non-audit services; and
            
            
         3. such services are promptly brought to the attention of the audit committee of the issuer and approved prior to the completion of the audit by the audit committee or by 1 or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.
            
            
   2. Disclosure to investors
      
      Approval by an audit committee of an issuer under this subsection of a non-audit service to be performed by the auditor of the issuer shall be disclosed to investors in periodic reports required by section 13(a).
      
      
   3. Delegation authority
      
      The audit committee of an issuer may delegate to 1 or more designated members of the audit committee who are independent directors of the board of directors, the authority to grant preapprovals required by this subsection. The decisions of any member to whom authority is delegated under this paragraph to preapprove an activity under this subsection shall be presented to the full audit committee at each of its scheduled meetings.
      
      
   4. Approval of audit services for other purposes
      
      In carrying out its duties under subsection (m)(2), if the audit committee of an issuer approves an audit service within the scope of the engagement of the auditor, such audit service shall be deemed to have been preapproved for purposes of this subsection.
      
      
10. Audit Partner Rotation
    
    It shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or coordinating) audit partner (having primary responsibility for the audit), or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer.
    
    
11. Reports to Audit Committees
    
    Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer--
    
    
    1. all critical accounting policies and practices to be used;
       
       
    2. all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and
       
       
    3. other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.
       
       
12. Conflicts of Interest
    
    It shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.
    
    
13. Standards Relating to Audit Committees
    
    
    1. Commission rules
       
       
       1. In general
          
          Effective not later than 270 days after the date of enactment of this subsection, the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of any portion of paragraphs (2) through (6).
          
          
       2. Opportunity to cure defects
          
          The rules of the Commission under subparagraph (A) shall provide for appropriate procedures for an issuer to have an opportunity to cure any defects that would be the basis for a prohibition under subparagraph (A), before the imposition of such prohibition.
          
          
    2. Responsibilities relating to registered public accounting firms
       
       The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee.
       
       
    3. Independence
       
       
       1. In general
          
          Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.
          
          
       2. Criteria
          
          In order to be considered to be independent for purposes of this paragraph, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee--
          
          
          1. accept any consulting, advisory, or other compensatory fee from the issuer; or
             
             
          2. be an affiliated person of the issuer or any subsidiary thereof.
             
             
       3. Exemption authority
          
          The Commission may exempt from the requirements of subparagraph (B) a particular relationship with respect to audit committee members, as the Commission determines appropriate in light of the circumstances.
          
          
    4. Complaints
       
       Each audit committee shall establish procedures for--
       
       
       1. the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and
          
          
       2. the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.
          
          
    5. Authority to engage advisers
       
       Each audit committee shall have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties.
       
       
    6. Funding
       
       Each issuer shall provide for appropriate funding, as determined by the audit committee, in its capacity as a committee of the board of directors, for payment of compensation--
       
       
       1. to the registered public accounting firm employed by the issuer for the purpose of rendering or issuing an audit report; and
          
          
       2. to any advisers employed by the audit committee under paragraph (5).
          
          

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