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March 10, 2003
BY HAND
Public Information Room
Office of the Comptroller of the Currency
250 E Street, SW, Mailstop 1-5
Washington, DC 20219
ATTN: Docket No. 02-15
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Ave., NW
Washington, DC 20551
ATTN: Docket No. R-1139
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
ATTN: Comments
Regulation Comments
Chief Counsel's Office
Office of Thrift Supervision
1700 G. Street, NW
Washington, DC 20552
ATTN: Docket No. 2002-58
Re: Joint Notice of Proposed Rulemaking
Dear Sirs:
These comments are submitted by the undersigned counsel on behalf of
Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP,
PricewaterhouseCoopers LLP and the American Institute of Certified
Public Accountants (collectively, "the Firms and the AICPA") in response
to the Joint Notice of Proposed Rulemaking (the "Joint Notice") issued
by the Office of the Comptroller of the Currency ("OCC"), the Federal
Deposit Insurance Corporation ("FDIC"), the Board of Governors of the
Federal Reserve System ("Federal Reserve"), and the Office of Thrift
Supervision ("OTS") (collectively, the "Agencies") (68 Fed. Reg. l116
(Jan. 8, 2003)) proposing regulations to remove, suspend or debar
accountants from performing audit services for insured depository
institutions with total assets of $500 million or more, pursuant to
Section 36 of the Federal Deposit Insurance Act, codified at 12 U.S.C. §
1831m (hereinafter referred to as "Section 36 Actions").
The Firms and the AICPA strongly support the goals of (i) developing
and implementing uniform, high quality professional standards applicable
to accountants and (ii) establishing a consistent mechanism to provide
oversight for adherence to such standards. These goals were central in
the enactment of the Sarbanes-Oxley Act of 2002. Pub. L. No. 107-204,116
Stat. 745 (2002). However, for the reasons described in greater detail
below, the Firms and the AICPA believe that the timing and substance of
the Joint Notice will not promote, and could impede, the achievement of
these goals. In addition, the proposed rules in their current form raise
substantial due process concerns.
Among other things:
• The Joint Notice does not explain why the Agencies believe that the
statutory and regulatory framework contained in the Sarbanes-Oxley Act
and the current statutes and regulations empowering the Agencies to take
administrative enforcement actions against accountants are insufficient
to address the requirements of Section 36. Since the proposed
regulations could duplicate or impinge upon other existing and
developing rules and standards the Agencies should first identify
regulatory gaps they need to fill in additional rulemaking.
• The Firms and the AICPA believe that the Agencies must articulate
clear and consistent standards for "good cause" to warrant the
initiation of a Section 36 Action. In order to promote uniform
standards, the Agencies' standards should be, at a minimum, consistent
with those promulgated by the Securities and Exchange Commission ("SEC")
and the Public Company Accounting Oversight Board ("PCAOB"). This is
particularly important where an insured depository institution is part
of, or is itself, a publicly-held issuer of securities subject to the
registration requirements of Section 12 of the Securities and Exchange
Act of 1934 ("1934 Act") and the jurisdiction of the SEC.
• The Firms and the AICPA believe that in sanctioning accountants,
the Agencies should defer to the PCAOB and the SEC in the case of banks
or savings associations that are "issuers" within the meaning of the
1934 Act. In the absence of such deference, an accountant or firm might
find its conduct subject to overlapping and conflicting regulatory
criteria in a given circumstance. The Firms and the AICPA believe that
such a result would be inconsistent with the goals of the Sarbanes-Oxley
Act and sound public policy principles.
• The proposal set forth in the Joint Notice provides that the
Agencies could bring a Section 3 6 Action based solely on conduct that
occurred at a nondepository institution. The Firms and the AICPA believe
that, unless there is a showing that an audit of a non-depository
institution has a direct bearing on the individual's or firm's fitness
or competence to perform audits of a depository institution, that
conduct should not disqualify the affected accountant or firm from
performing Section 36 Audit Services for insured depository
institutions.
• The Firms and the AICPA believe that any new regulations must
specify what record the Agencies will rely on in determining whether
conduct at a nondepository institution constitutes "good cause." The
Firms and the AICPA do not believe that the Agencies intend to, or
should, conduct independent investigations of the facts and
circumstances that might suggest violations at the non-depository
institution, and believe that the rule should clarify that such
investigations are not intended.
• In enacting the Financial Institutions Regulatory Reform Recovery
and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat.
183 (1989), Congress substantially expanded the enforcement authority
over institution-affiliated parties ("lAPs"). As noted below, such IAPs
could, under certain circumstances, include individual accountants and
accounting firms. The Agencies' authority to sanction individual
accountants as IAPs reaches situations, for instance, in which the IAP
"knowingly or recklessly participates in ... any unsafe or unsound
[banking] practice, which caused or is likely to cause more than a
minimal financial loss to, or a significant adverse effect on, the
insured depository institution." 12 U.S.C. 1 813(u). Yet, the
legislative history of FIRREA makes it clear that Congress did not
expect the Agencies to use their enforcement authority to remove or
otherwise restrict entire firms. The proposal set forth in the Joint
Notice describes specific criteria that the Agencies may take into
consideration in deciding whether to bring a Section 36 Action against
an entire firm or office(s) of a firm. The Firms and the AICPA believe
that any final regulations should, consistent with the legislative
history of FIRREA, include a strong presumption against bringing Section
36 Actions against entire firms or offices absent the existence of
certain egregious factors, which should be clearly specified in advance.
In addition, as described in greater detail below, given the potentially
devastating impact of such actions, they should only be taken after the
affected firm has had an opportunity for a meaningful hearing before an
independent trier of fact.
• The proposal set forth in the Joint Notice gives the Agencies
unfettered discretion, without any written standards, to consider any
request for reinstatement and limits an individual's or firm's right to
petition for reinstatement. The Firms and the AICPA believe that the
reinstatement provisions should articulate clear and objective standards
by which the Agencies will consider and act upon any request for
reinstatement.
• The Joint Notice specifically solicits comments on the due process
considerations associated with the suspension provisions by which the
Agencies could immediately suspend an accountant, subject to the
issuance of a stay by a presiding officer appointed by the Agency. The
Firms and the AICPA believe that the Joint Notice raises serious due
process concerns in this regard. At a minimum, the Firms and the AICPA
believe that given the immediate and draconian sanctions at issue, the
rules should provide for a hearing before an administrative law judge
and timely judicial relief. The Firms and the AICPA also believe that
the burden should be on the Agency to justify the issuance of an
immediate suspension under a clear and exacting standard.
The Firms and the AICPA have a number of specific suggestions, set
forth in greater detail below, that they believe will clarify and
improve the proposed regulations set forth in the Joint Notice. In view
of the importance of the issues the Joint Notice seeks to address and
the substantive and procedural concerns raised by the proposal, the
Firms and the AICPA respectfully request that, after the Agencies have
had an opportunity to consider these and other comments submitted in
response to the Joint Notice, the Agencies issue revised regulations to
the public for final comment before such regulations are adopted by the
Agencies.
I. THE IMPACT OF THE EXISTING REGULATORY FRAMEWORK
To fully appreciate certain of the Firms' and the AICPA's comments
regarding the proposal contained in the Joint Notice, it is important to
consider the Agencies' proposed regulations in the context of the
existing statutory and regulatory framework. Congress enacted Section 36
of the FDIA on December 19, 1991. Section 36 requires that each insured
depository institution with total assets of $500 million or more obtain
an audit of its financial statements and an attestation by an accountant
on management's assertions concerning internal controls over financial
reporting. The audit report and attestation must be included in the
depository institution's annual report. Section 36 gives the Agencies
authority to remove, suspend, or debar accountants from performing such
audit services if there is "good cause" to do so.
Since the enactment of Section 36 in 1991, the Agencies have not
previously proposed or promulgated any implementing regulations, nor are
we aware of any action brought by the Agencies to disbar, remove or
suspend an accountant under the Section 36 authority. This suggests that
the Agencies have viewed their existing enforcement authority-which is
quite broad-as sufficient to address instances of misconduct by
accountants properly within the Agencies' jurisdiction. This existing
authority, now coupled with the new statutory and regulatory schemes
provided by the Sarbanes-Oxley Act, results in a mechanism that provides
comprehensive oversight over the accounting profession, including over
many accountants performing Section 36 Audit Services.
The Agencies have two ways in which they may sanction accountants.
First, if an accountant is deemed to be an IAP, the accountant may be
subject to the administrative enforcement authority of the appropriate
federal banking agency. See 12 U.S.C. § 1818(e). In order to satisfy the
statutory definition of IAP, the Agency must show wrongful conduct and
harm to the institution by the accountant. See 12 U.S.C. § 1813(u).
Historically, it appears that the courts have accorded deference to the
agencies in satisfying the wrongful conduct element. Once an accountant
is determined to be an IAP, the Agency has the authority to initiate an
action to remove or suspend the accountant from office, prohibit the
accountant from participating in the affairs of an insured depository
institution, or assess civil money penalties, provided certain statutory
criteria are satisfied. See 12 U.S.C. §§
1818(e)(1),1818(e)(3),1818(i)(2).
Second, each Agency has adopted regulations to censure, suspend, or
debar any person from practicing before it, which includes accountants.
Under these regulations, accountants practice before each Agency by,
among other things, preparing the audit or attestation report that is
filed with an insured depository institution's annual report. See 12
C.F.R. § § 19.191(a), 263 .92(b)( 1 ), 308.109(e), 513.2(e)(2). The
Agencies' rules differ somewhat, but generally the Agency regulations
provide for sanctions if an accountant is "incompetent" in representing
a client's "rights or interests" or engages in "disreputable conduct".
See 12 C.F.R. §§ 19.195, 19.196, 263.91, 263.94, 308.109, 513.4(a).
On July 30, 2002, the President signed into law the Sarbanes-Oxley
Act of 2002. Congress had passed this legislation in the wake of recent
corporate scandals to ensure that investors had access to accurate and
meaningful financial information concerning public companies.
Specifically, Congress hoped to renew the public's faith in the
reliability of the financial statements of public companies and thus
increase public confidence in the capital markets of the United States.
To promote these goals, Congress invested both the SEC and the newly
created PCAOB with the responsibility to oversee both the accounting
profession, and the manner in which accountants interact with their
public company audit clients so that audit reports on financial
statements of public companies are even more reliable and independent
than they have been in the past.
Significantly, for purposes of the Joint Notice, the Sarbanes-Oxley
Act of 2002 created the PCAOB to, among other things, discipline members
of the profession where appropriate. The jurisdiction of the Board
extends to accountants who perform audits of any public company, bank or
savings association that must file reports with the SEC or with one of
the four Agencies, and the SEC is given oversight over the PCAOB. This
supervision of accountants parallels the mandate for registered banks
and savings associations themselves to adhere to Sarbanes-Oxley and the
SEC's implementing regulations. See, e.g., Reporting and Disclosure
Requirements for State Member Banks with Securities Registered Under the
Securities Exchange Act of 1934, 67 Fed. Reg. 57938 (Sept. 13, 2002) (to
be codified at 12 C.F.R. pt. 208) (amending the disclosure requirements
for registered state member banks).
In order for an accountant or an accounting firm to audit a publicly
held bank, savings association or other company, it must first register
with PCAOB. The Board then acquires regulatory and supervisory
jurisdiction over the registered accounting firm, including establishing
or adopting rules regarding auditing, quality control, ethics,
independence, and other standards relating to the preparation of audit
reports for issuers; regularly inspecting registered firms; and, when
appropriate, imposing sanctions on registered public accounting firms or
persons associated with such firms. Sarbanes-Oxley Act, § 101(c).
The PCAOB is structured as a nonprofit corporation whose purpose is
to promote integrity and independence. The Board by statute consists of
five members with substantive accounting expertise: of the current
members, two are certified public accountants, one is a former SEC
General Counsel, and one served as Chief Accountant in the SEC's
Division's of Enforcement and was co-chairman of the SEC's Financial
Fraud Task Force. No member of the Board may accept other employment or
engage in any other professional or business activity, but instead must
devote his or her full time to supervising the accounting profession.
Sarbanes-Oxley Act, § 101(e)(3).
The PCAOB, in turn, is supervised by the SEC, which appoints the
Board's members; approves its budget; reviews, modifies as appropriate,
and publishes in the Federal Register any PCAOB proposed or final
regulation; and reviews Board disciplinary actions against accountants.
Sarbanes-Oxley Act, § § l 01(e)(4),107,109. The SEC already has issued
regulations implementing the provisions of sections 201, 202, 203, 204,
and 206 of the Sarbanes-Oxley Act to limit accountants from providing
specified non-audit services and fees; require audit committee
pre-approval of the accountant's audit and non-audit services; require
rotation of audit partners; limit audit partner compensation; mandate
auditor communication with the audit committee regarding critical
accounting policies, alternative accounting treatments, and other
management communications; and restrict client employment of former
audit team members. See Strengthening the Commission's Requirements
Regarding Auditor Independence, 68 Fed. Reg. 6006 (Feb. 5, 2003) (to be
codified at 17 C.F.R. pt. 210, 240, 249, 274). Finally, Section 108 of
Sarbanes-Oxley confers on the SEC direct responsibility to oversee
development of and recognize the generally accepted accounting
principles governing presentation of the financial statements on which
registered accounting firms will opine. Sarbanes-Oxley Act, § 108(b).
Because Congress has authorized the SEC and the PCAOB to license,
establish standards for, and, where appropriate, discipline accountants
for public companies, the regulatory scheme that existed at the time the
Agencies first considered the need for the proposed regulations has
already been substantially altered and enhanced.
Thus, the Firms and the AICPA urge that the Agencies proceed
cautiously because (1) the existing statutory framework already provides
the Agencies with powerful enforcement tools over IAPs (which may
include accountants under certain circumstances), and (2) with the
passage of the Sarbanes-Oxley Act and the establishment of the PCAOB,
the Agencies should take into consideration the PCAOB's and SEC's
standards and processes before deciding how best to implement Section
36.
II. SPECIFIC COMMENTS
The Firms and the AICPA offer the following specific comments to the
proposed regulations set forth in the Joint Notice.
A. DEFINITION OF "GOOD CAUSE"
Section 36 authorizes the Agencies to remove, suspend, or debar an
accountant for "good cause." The Joint Notice states that the Agencies
would have good cause to sanction an accountant if the accountant does
not possess the requisite qualifications to perform audit services;
engages in knowing or reckless conduct that results in a violation of
applicable professional standards, including those standards and
conflicts of interest provisions applicable to accountants through the
Sarbanes-Oxley Act and developed by the PCAOB and the SEC as such
standards become effective; engages in a single instance of highly
unreasonable conduct that results in a violation of applicable
accounting standards in circumstances in which an accountant knows, or
should know, that heightened scrutiny is warranted; or engages in
repeated instances of unreasonable conduct, each resulting in a
violation of applicable standards, that indicate a lack of competence to
perform annual audit services. 12 C.F.R. §§ 19.243(a), 263.402(a),
308.602(a), 513.8(c). "Good cause" also includes knowingly or recklessly
giving false or misleading information to the Agencies with respect to
any matter before the Agency; knowingly or recklessly materially
violating any provision of the federal banking or securities laws or
regulations, or any other law, including the Sarbanes-Oxley Act; and
removal, suspension, or debarment from practice before any federal or
state agency regulating banking, insurance, or securities, on grounds
relevant to the provision of audit services, other than those actions
that result in automatic removal, suspension, and debarment under the
Joint Notice. 12 C.F.R. §§ 19.243(a), 263.402(a), 308.602(a), 513.8(c).
The Firms and the AICPA believe that the proposed definition of "good
cause" is substantively deficient in two material respects. First, the
standard can result in inconsistencies with PCAOB's and the SEC's
actions. Second, the Joint Notice contemplates that conduct giving rise
to good cause does not have to occur in connection with performing audit
services or in connection with services provided to depository institutions.
l. Need for Consistency
The Joint Notice seeks to regulate the accounting industry further by
giving each Agency the power to sanction accountants or their firms for
misconduct. However, under Sarbanes-Oxley, Congress vested the PCAOB
with the power to sanction accountants or their firms for misconduct.
Unless the proposal set forth in the Joint Notice is conformed to the
standards to be promulgated by the PCAOB or used by the SEC, accountants
may be subject to conflicting sets of principles and procedures.
Congress gave the PCAOB, overseen by the SEC, the power to
investigate and discipline members of the accounting industry who audit
public companies, including banks and savings associations. Under
Section 105 of the Sarbanes-Oxley Act, the PCAOB is required to
establish rules and procedures for the investigation and disciplining of
registered public accounting firms and associated persons of such firms.
These rules have not yet been issued. The Agencies must ensure that its
rules are, at a minimum, consistent with those established by the PCAOB
and should defer to that body in this regard. Since many insured
institutions either are public companies, or are subsidiaries of public
companies, accountants who audit an insured depository institution that
is also a public company will be subject to potentially different sets
of rules if the Agencies move forward with the current proposal.
This potential for inconsistency and conflict is particularly acute
when a question arises in the context of a national bank or a state
non-member bank which has exercised its option to satisfy its reporting
requirements under Section 36 by filing financial statements and an
internal control report of the bank's parent holding company. See 12
C.F.R. § 363.1(b). The Agencies' proposal recognizes that the bank's
primary regulator (either the OCC or the FDIC) lacks jurisdiction over
the holding company's accountant, and thus confers on the Federal
Reserve the authority to sanction the holding company's accountant for
"good cause" even though it may be the OCC or the FDIC that questions
the accountant's work or qualifications. The Firms and the AICPA believe
that it should be the expert PCAOB and the SEC, which already have
jurisdiction over the holding company and its accountant, who should
resolve any questions about the accountant's qualifications or
performance, rather than the Federal Reserve, which neither received the
audit opinions in question nor has the expertise in accounting and
auditing possessed by the SEC and the PCAOB.
Furthermore, the Firms and the AICPA believe that the same set of
rules, and the same investigative process, should apply to accountants
who audit both public and privately held insured depository
institutions. In fact, it is likely in many instances that a single
accounting firm will audit both an insured depository institution that
is a public company and an insured depository institution that is not a
public company. Having one, uniform standard for all insured depository
institutions, is clearly consistent with the Congressional mandate of
Sarbanes-Oxley and would best serve the public interest in consistency
and certainty.
In addition, by deferring to the SEC and the PCAOB, the Agencies
would not be giving up their power to discipline accountants in
appropriate circumstances. As noted above, the Agencies already have
broad administrative remedies to take actions against IAPs. Furthermore,
if the PCAOB feels it is necessary or appropriate, the statute
specifically authorizes it to refer an investigation to the appropriate
federal banking agency if the investigation concerns an audit report for
an institution that is subject to the jurisdiction of that regulator.
Sarbanes-Oxley Act, § 105(b)(4)(B)(ii). Once an Agency receives such a
referral, it may, in appropriate circumstances, use its current
enforcement mechanisms to discipline accountants. The adequacy of the
Agencies' current enforcement mechanisms against IAPs and under the
Agencies' practice regulations is demonstrated by the fact that the
Agencies have not invoked Section 36 to remove, suspend, or debar an
accountant for "good cause" even though that statute was enacted twelve
years ago.
2. Conduct at Non-Depository Institutions
In the Joint Notice, the Agencies make clear that conduct giving rise
to "good cause" does not have to occur at an insured depository
institution. 68 Fed. Reg. at 1118. This authority raises a number of
significant substantive and procedural issues.
As a threshold matter, the Firms and the AICPA question the
appropriateness of the Agencies taking action against an accountant or
firm based solely on conduct at a non-depository institution. In the
Joint Notice, the Agencies have failed to make any showing of the
relevance of conduct at a non-depository institution to the fitness of
an accountant or a firm to perform Section 36 Services.
Assuming arguendo that the Agencies could demonstrate that conduct at
a nondepository institution can be probative, the Firms and the AICPA
believe that, at a minimum, the final rules must clarify when and how
the Agencies will use audit work at a non-depository institution to
serve as a predicate to initiate a Section 36 Action. In clarifying this
important issue, consideration must be given to how the Agencies will
determine what occurred during the audit of a non-depository
institution. For example, the Firms and the AICPA assume that the
Agencies do not expect to conduct their own independent investigation or
obtain information regarding the audit directly from the nondepository
institution, since any such investigation would raise serious
jurisdictional and policy issues for the Agencies. In addition, given
the Agencies' focus on financial institutions, they may lack the
relevant industry expertise to evaluate conduct at a nondepository
company.
These difficulties clearly can be avoided through reliance on the
work of the PCAOB.
B. DISQUALIFICATION OF ENTIRE FIRM
Under the proposal set forth in the Joint Notice, the Agencies
theoretically can remove, suspend, or debar an entire accounting firm,
or an office of the accounting firm, for the action of a single
employee. 12 C.F.R. §§ 19.243(a)(2), 263.402(a)(2), 308.602(a)(2),
513.8(d). The proposal includes a list of factors and circumstances for
the Agencies to consider when deciding whether to sanction an entire
firm. According to the Joint Notice, these factors are not exclusive and
the Agencies may take into account other factors when deciding whether
to remove, suspend, or debar an entire accounting firm or office of that
firm. 68 Fed. Reg. at 1118.
The Firms and the AICPA are concerned that under the language of the
proposed rule, an entire firm could be disciplined for the actions of a
single person. Sanctioning an entire firm is a draconian result that
should be available only in the most egregious situations. The Firms and
the AICPA also believe that the disqualification of an entire firm
should never be automatic or immediate. This very same concern was
expressed when similar issues were raised during the consideration of
FIRREA. As noted herein, FIRREA gave the Agencies the authority to
remove an IAP from office. 12 U.S.C. § 1818(e). FIRREA's legislative
history makes clear that Congress "expect[ed] the banking agencies
to
limit enforcement actions in the usual case to individuals who have
participated in the wrongful action, to prevent unintended consequences
or economic harm to innocent third parties." H.R. Rep. No. 101-54(I), at
467 (1989), reprinted in 1989 U.S.C.C.A.N. 86,263. (emphasis supplied).
Removing, suspending, or debarring an entire accounting firm from
practice before an Agency indisputably will have both immediate and long
term adverse consequences for the firm, its clients and employees. Thus,
any new regulations should ensure that this powerful remedy is carefully
circumscribed. For this reason, and consistent with Congressional
intent, the Firms and the AICPA believe that there should be an explicit
presumption against taking an action against an entire firm. In
addition, the regulations should be drafted so that this sanction is
available only in the most egregious circumstances, specifically
articulated in the regulation itself. The list of factors that must be
present to justify imposing sanctions on a firm should be limited to the
kind of egregious circumstances that would justify the extremely serious
direct and indirect effects of sanctioning an entire office or firm.
The Firms and the AICPA believe the current proposal, as it relates
to the disqualification of an entire firm, is much too broad, much too
subjective, and much too open ended. Furthermore, because of the
potentially devastating consequences of sanctioning an entire accounting
firm, the Firms and the AICPA believe that the affected firm should have
the opportunity for a meaningful hearing with the presentation of
evidence and the cross-examination of witnesses in front of an
independent trier of fact to ensure due process. These procedural
concerns are addressed in section E below.
C. REINSTATEMENT
The Joint Notice provides that an individual or an accounting firm
must wait one year from the effective date of an order of suspension to
petition for reinstatement. 12 C.F.R. §§ 19.246(a), 263.405(a),
308.605(a), 513.8(l)(1). If the request for restatement is denied, the
accountant or accounting firm must wait an additional year to
re-petition for reinstatement. The Joint Notice is silent on the factors
that the Agencies must consider in evaluating a reinstatement petition.
The Joint Notice does not explain why the Agencies believe that a
one-year waiting period is appropriate or warranted. The Firms and the
AICPA believe that requests for reinstatement should be considered on a
case-by-case basis and not be subject to an arbitrary, one-year
limitation. Indeed, under the SEC's Rules of Practice (which we
understand the Agencies intended to follow in the Joint Notice), an
application for reinstatement may be made at any time. SEC Rules of
Practice, Rule 102(e)(5). For example, any accountant suspended by the
SEC because their license to practice has been revoked by a state, or
any person suspended because he or she was convicted of a felony
involving moral turpitude, can be reinstated at any time upon a showing
that the suspension has been terminated or the conviction has been
reversed. SEC Rules of Practice, Rule 102(e)(5)(ii).
The Firms and the AICPA also believe that the regulations should
include clear standards to be applied by the Agencies in acting upon a
reinstatement petition. Such standards would assist an affected
individual or firm in providing the appropriate Agency with the types of
information that the Agency believes it needs to make an informed
decision regarding a reinstatement petition. These standards also would
assist the Agency in its decision making process and in informing
persons of the standards to which they must conform their behavior in
order to be reinstated.
D. AUTOMATIC SUSPENSIONS
The Joint Notice sets forth standards for automatic suspension of an
accountant or an accounting firm. An accountant or an accounting firm is
automatically suspended and may not provide audit services for an
insured depository institution if it is subject to a final order of
removal, suspension, or debarment from any federal banking agency, is
subject to a temporary suspension or permanent revocation of
registration by PCAOB, is subject to an order of suspension from
appearing before the SEC, or is suspended or debarred from practice in
any state or the District of Columbia. 12 C.F.R. §§ 19.244, 263.403,
308.603, 513.8(j).
The Firms and the AICPA believe that this provision is too broad in
scope. An accountant can well be subject to suspension or revocation by
the SEC or the PCAOB for reasons that are of little or no relevance to
the legitimate supervisory concerns of the Agencies. For example, assume
that in August 2003, a foreign affiliate of a United States accounting
firm provided an overseas subsidiary of the accounting firm's United
States audit client a non-audit service that the client's audit
committee does not pre-approve. Under Sarbanes-Oxley § 208(b), it then
becomes "unlawful" for the United States firm to prepare or sign an
audit report for the United States client's fiscal year ending Dec. 31,
2003. While no one can predict what the SEC or PCAOB will do when faced
with such an issue, as it inevitably will be, resolution of this issue
should not trigger an automatic suspension at a banking agency without
notice and some opportunity for the Agency to explore the facts,
including those the United States firm may wish to present. While the
Agencies may well conclude that such a suspension or revocation provides
grounds for a finding of good cause upon which an accountant may be
subject to a sanction, the action should not be automatic but should be
based on a careful analysis of the facts and circumstances.
Indeed, the SEC rules governing suspensions do not go as far as the
Agencies propose. Under its Rule 102(e)(2), an accountant is subject to
automatic suspension from practice before the SEC only when the
accountant's license has been suspended or revoked by a state, or where
the accountant has been convicted of a felony or a misdemeanor involving
moral turpitude. The SEC provides for a process somewhat similar to what
the Agencies propose under SEC Rule 102(e)(3), but only if the
accountant has been permanently enjoined in a case brought by the SEC
for violations of the securities laws, or if the accountant has been
found to have violated the securities laws in an action brought by the
SEC or in an administrative proceeding before the SEC. In such
proceedings, the respondent would have had a prior opportunity to
present its defense before a trier of fact in a proceeding in which the
agency imposing the suspension has participated. The Agencies, at a
minimum, should similarly limit the reach of their automatic suspension
provisions.
Furthermore, nowhere in the Joint Notice is there a process for
review of an automatic suspension. Due process requires that anyone
suspended from practice be afforded a meaningful review of the
suspension. See FDIC v. Mallen, 486 U.S. 230, 240 (1988); Manges v.
Camp, 474 F.2d 97 (5th Cir.1973); Feinburg v. FDIC, 420 F. Supp. 109
(D.D.C.1976). Although an accountant or an accounting firm that is
automatically suspended from practicing before the Agencies may request
that it be allowed to perform audit services, the Joint Notice does not
include any other review procedure. The Firms and the AICPA believe that
the proposed rules must be modified so that automatic suspensions will
be subject to an expedited review process before an independent
decisionmaker.
E. IMMEDIATE, EX PARTE SUSPENSIONS
Under the proposal set forth in the Joint Notice, the Agencies may
issue a notice of immediate suspension when the Agency has a reasonable
basis to believe that an accountant or accounting firm has engaged in
conduct that constitutes grounds for an order to remove, suspend or
debar and "if an immediate suspension is necessary to protect the
insured depository institution, its depositors, or the depository system
as a whole." 12 C.F.R. § § 19.243(c)(1), 263.402(c)(1), 308.602(c)(1),
513.8(g)(1). Not only is the suspension immediate, but it is entered ex
parte and remains in effect until the Agency dismisses the charges in
the notice or issues a final order of removal, debarment or suspension.
The proposal shifts the burden to the accountant or firm to seek a
"stay" of the immediate suspension essentially under the high standards
required for the issuance of injunctions. The proposal contemplates an
"expedited" review of any appeal filed by an adversely affected
accountant or accounting firm.
As an initial matter, the Firms and the AICPA do not believe that any
circumstances exist where an ex parte suspension of an entire firm would
be justified.
For example, the actions of a few individuals that might arguably
justify an ex parte suspension of such individuals should not be grounds
to disqualify an entire firm. At a minimum, the Agencies should issue
standards that explain when an ex parte suspension of an entire firm
could possibly be appropriate. Specifically, these standards should
relate to the number of individuals involved, the egregiousness of their
conduct, the relationship of those individuals to the overall operation
of the firm, the nexus between the conduct at issue and the risks
created of immediate harm that can only be prevented by immediate
suspension of the entire firm, and similar factors that would be needed
to justify such an extraordinary action.
In any event, the proposed procedure for immediate, ex parte
suspensions would not comport with due process. There is simply no basis
for the Agencies to create a process by which they will decide in a
closed internal procedure to impose this death knell on an accountant or
a firm, and then shift onto the accountant or firm the burden of meeting
the high injunctive standards in order to obtain relief via an process
that itself is not sufficiently neutral. Once again, the Agencies should
refer to the rules governing the SEC's procedures in redrafting
regulations governing such suspensions.
The Agencies recognized the serious due process issues raised by this
aspect of the Joint Notice by specifically inviting comment on whether
"additional procedures should be provided to ensure that parties have
adequate due process protections." 68 Fed. Reg. at 1119. The Agencies
cite to FDIC v. Mallen, 486 U.S. 230 (1988), for support for the
proposal. In Mallen, the Court upheld the FDIC's procedures for
suspension of an institution-affiliated party who was charged with a
felony. But the Joint Notice's very description of the case reflects its
limitations - it involved the particular circumstance of someone who had
been indicted for a felony. The current proposal ranges far beyond that,
and would purport to give the Agencies authority to suspend immediately,
and shift the burden to the accountant or firm to meet the high
injunctive standard, merely on an ex parte, internal decision under the
extremely broad and vague standard that "immediate suspension is
necessary for the protection of an insured depository institution, its
depositors, or the depository system as a whole." 68 Fed. Reg. at 1118. Mallen does not support such an assertion of power.
In Mallen, the Court upheld a procedure used by the FDIC where a
suspended party had to wait a maximum of 90 days for a decision
regarding removal from office. Mallen involved a criminal felony
indictment. 486 U.S. at 241, 244, 245. Thus, a grand jury and an
independent U.S. Attorney-both independent of the Agency-concluded they
had probable cause to believe that the charges against the respondent
were true. Id. at 244. Furthermore, the indictment served as at least
some objective indication that the bank operated by the respondent was
not being managed in a responsible manner. Id. at 244-45. Additionally,
the Court said that there was no danger of injuring the respondent's
reputation with the immediate suspension since the respondent had
already been indicted by a grand jury. Id. at 243.
Under the proposal set forth in the Joint Notice, an accountant or
accounting firm may petition for a stay of a notice of immediate
suspension within ten (10) calendar days of receiving the notice.
Thereafter, an officer appointed by the Agency will hold a hearing on
the stay petition within thirty (30) days of receiving the petition and
the officer will render a decision on the hearing within 30 days. Thus,
the entire process could take seventy (70) days before an adversely
affected individual or firm receives a final decision.
If the Agencies are looking for a barometer of what due process
requires at a minimum, they should look to the SEC's rules. Presumably,
the SEC will want to move expeditiously to remove persons or entities
that the agency believes poses dangers to the entities it regulates - in
the SEC's case, all companies issuing publicly-traded securities. Yet,
the SEC has put in place rules under which (1) the circumstances under
which the staff may seek a temporary cease-and-desist order are limited,
and the staff must justify the proceeding on an ex parte basis, (2) the
action is both initially authorized and reviewed by a much more neutral decisionmaker, an Administrative Law Judge, (3) the affected party has a
mechanism to ensure much swifter consideration of its position, and (4)
the burden rightfully remains on the staff of the agency throughout the
process to justify its claim to this extraordinary relief.
The closest analogy in the SEC rules to what the Agencies seek to do
with their immediate suspension power is the SEC's issuance of temporary
cease-and- desist orders. Under the 1934 Act, the SEC's authority to
issue such orders is limited. It cannot be used to suspend immediately
any accountant who arguably might ultimately be subject to sanction for
improper conduct. Rather, it is available in more limited circumstances
and with considerably greater due process protections. The Agencies
should act with similar care in promulgating Section 36 regulations.
To obtain a temporary cease-and-desist order, the SEC staff must go
before an administrative law judge and make a showing that the standards
for such an order have been met. Notice to the affected party is
generally required. Ex parte applications are the exception and may be
obtained only if "notice and hearing prior to entry of an order would be
impracticable or contrary to the public interest." SEC Rules of
Practice, Rule 513(a). If action is taken ex parte, the affected party
may obtain a reconsideration of that decision within 20 days or less.
SEC Rules of Practice, Rule 513(c). Any respondent who is subject to a
temporary cease-and-desist order issued by the SEC without a prior
hearing may request such a hearing within 10 days. After such a
request, the hearing is held within two days and a decision rendered
within five days. SEC Rules of Practice, Rule 513(c).
Before the SEC issues a temporary cease-and-desist order against a
party, the SEC staff must satisfy a high evidentiary standard.
Specifically, the SEC Rules of Practice follow the standards of Rule 65
of the Federal Rules of Civil Procedure and require a showing that
immediate and irreparable injury, loss, or damage will result if an
order is not granted. See SEC Rules of Practice, Rule 512; Fed. R. Civ.
P. 65(b). Thus, under the SEC rules, the staff seeking the relief must
prove immediate and irreparable harm, not the sanctioned party. That
burden properly remains on the staff throughout the process.
The proposal in the Joint Notice turns this burden on its head. It
would not require Agency staff to meet a clear, well-established and
high standard, such as the standard for preliminary injunctions.
Instead, it would in fact turn around and impose such a burden on the
affected party. There is simply no justification or basis for such a
skewed process.
The procedure proposed in the Joint Notice suffers from another
serious defect. While the SEC holds hearings in its adjudicatooy
capacity, or uses administrative law judges to hear matters, the Joint
Notice contemplates that the initial decision to suspend simply be made
sua sponte by the staff, and then a "presiding officer" will be
appointed to preside over a hearing on the suspension. The presiding
officer fixes the time and place for the hearing and has the discretion
to decide whether oral testimony will be allowed at the hearing. The
presiding officer will ultimately issue the decision regarding a
challenge to an immediate suspension.
The Firms and the AICPA believe this process is very deficient. An
independent administrative law judge should review the immediate
suspension in the first instance. The Administrative Procedure Act ("APA")
created the position of administrative law judge to ensure fairness and
due process in federal agency adjudication proceedings. The APA
specifically addressed those goals by making administrative law judges
independent of the agencies whose cases they decided. The Firms and the
AICPA believe that such an impartial party should oversee the Agency
hearings on all suspensions, particularly where the staff asserts that
suspensions must occur immediately.
In addition, the Joint Notice does not establish a procedure for
judicial review for such proceedings. Although a suspended party can
appeal a presiding officer's decision within the Agency, the Joint
Notice would not empower the suspended party to appeal a decision to an
administrative law judge or a federal court. The Firms and the AICPA
believe that such review is necessary to ensure fairness and
impartiality. Thus, the final rules should include a process for
appealing the initial decision to impose an immediate suspension to a
neutral third party, and ultimately to the federal courts.
In sum, the Firms and the AICPA believe that the final regulations
must provide for a much fairer process whenever the Agencies seek to
impose immediate suspensions. Ex parte proceedings should be limited to
those circumstances that demand it. The burden should be on the staff
throughout the process to demonstrate the need for immediate action
under a very high, clearly articulated and, ideally, well-established
standard, such as the standard for a preliminary injunction. The party
subject to any such action - ex parte or not - should have immediate
recourse to a review process. Finally, a neutral decisionmaker and
judicial review should be provided.
The Firms and the AICPA appreciate this opportunity to submit
comments on the Joint Notice and hope their comments will be taken into
consideration by the Agencies in developing final rules. In view of the
substantive concerns set forth herein, representatives of the Firms and
the AICPA respectively request an opportunity to meet with the Agencies
to discuss the Joint Notice. If you have any questions regarding the
matters discussed in this letter, please do not hesitate to contact us.
Sincerely, Arnold & Porter By:
Stephen M. Sacks
Richard M. Alexander
Geoffrey F. Aronow
555 Twelfth Street, NW
Washington, DC 20004-1206
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