The Bond Market Association and Securities Industry Association
Oct. 13 asked the Securities and Exchange Commission to
"encourage" the American Institute of Certified Public
Accountants to "publicly repudiate" an AICPA draft white
paper that seeks to circumscribe the auditor's role in the due
diligence process.
The request came in BMA's and SIA's joint letter to SEC officials
reporting, as requested by the SEC, on an Oct. 11 meeting hosted by
the AICPA regarding the document. The SEC officials were Donald T.
Nicolaisen, the SEC's chief accountant; Alan L. Beller, director of
the Division of Corporation Finance; and Carol Stacey, chief
accountant in the division.
BMA and SIA have contended that the guidance in the AICPA draft
white paper effectively would end auditor participation in the due
diligence process, thereby harming investors. At the Oct. 11 meeting,
which took place in New York, Randy Snook, executive vice president
and head of BMA's New York office, told BNA,"We requested that
the white paper be withdrawn and repudiated, and that request fell on
deaf ears."
Separately, SEC spokesman John Nester told BNA, "We have
received the letter and are considering appropriate steps. Our
interest is protecting investors and markets." He declined to
comment further and said other SEC officials would not
comment.
AICPA Sees 'Inaccuracies' in Letter.
AICPA spokesman Joel Allegretti Oct. 13 provided BNA with a
statement: "We are reviewing the Oct. 13 letter submitted to the
SEC by the Securities Industry Association and The Bond Market
Association. We see numerous inaccuracies. The letter mischaracterizes
the meeting. We believe it is counterproductive to politicize a
meeting that was designed to launch dialogue on how all parties can
work together to best serve the public interest."
"Nevertheless," Allegretti said, "we are still
willing to work with these groups to serve the best interests of
investors and other affected stakeholders."
On Oct. 11, the AICPA Center for Public Company Audit Firms, which
produced the white paper, said it never intended the draft white paper
to become public and that the AICPA has no plans to circulate it to
its members.
Meanwhile, SIA President Marc Lackritz said Oct. 12 that, if
necessary, SIA is willing to turn to federal regulators for help in
prodding the auditing industry into participating in the due diligence
process.
According to Snook, BMA would like the AICPA, after repudiating the
white paper, to participate in a forum involving investors and
regulators, as well as private industry participants, to discuss the
auditor's role in the due diligence process. Snook told BNA that one
option for such a gathering might be a roundtable hosted by the SEC
and the PCAOB.
Private Negotiations.
The New York meeting about the Aug. 23 white paper, "Auditors
Attendance at Due Diligence Meetings with Underwriters," took two
hours, BMA and SIA reported. Its participants included, for the AICPA,
representatives of six audit firms; for BMA and SIA, representatives
of nine investment banks and senior association staff members; and
representatives of the New York City Bar Association's Financial
Reporting Committee and several law firms.
In their letter to the SEC, BMA and SIA referred to the draft AICPA
white paper as White Paper II. "Over the past few years, we have
observed a disturbing trend of auditor withdrawal from the due
diligence process, which culminated in White Paper II," they
wrote.
In an Oct. 6 letter to the AICPA Center for Public Company Audit
Firms, BMA and SIA strongly opposed the AICPA's proposed guidance. By
effectively ending auditor participation in due diligence, they said,
the white paper would seriously jeopardize investor protection. For
example, the groups urged, the white paper would prohibit auditors
from discussing with the underwriter internal financial controls,
awareness of fraud or illegal acts, and specific items in financial
statements. Among other things, it suggests that auditors have no duty
to correct any management misstatement made to the underwriters in the
auditors' presence.
"The draft subverts long-standing due
diligence practices."
BMA President Micah Green,
"The draft subverts long-standing due diligence
practices," Micah Green, president and chief executive officer of
BMA said Oct. 7. "Securities law reflects a basic belief that due
diligence is a key element in ensuring good
disclosure."
PCAOB Role.
The BMA and SIA letters to the AICPA and SEC also argued that
pursuant to the reforms of the Sarbanes-Oxley Act of 2002, only the
Public Company Accounting Oversight Board (PCAOB) is authorized to
establish and interpret auditing standards. Thus, they argued, the
AICPA is not authorized to do so in the white paper. Nonetheless, the
two protesting groups said that the AICPA draft white paper purports
to interpret existing standards for formal auditor reports as applying
to informal due diligence discussions.
Snook told BNA that BMA is "in communication with the PCAOB
officials" and considering whether to write to them. Meanwhile,
the PCAOB has been quiet on the AICPA white paper, the New York
meeting, and the BMA-SIA correspondence. On Oct. 12 and Oct. 13, PCAOB
spokesman Mike Shokouhi told BNA, "We are aware of this issue and
are monitoring developments carefully."
The SIA-BMA letter to the SEC characterized the AICPA's positions
at the meeting as being counterproductive and an indication "that
… they do not yet accept that, in the interest of investor
protection, full auditor participation in due diligence discussions is
critical."
The joint letter urged that contrary to AICPA statements at the New
York meeting, auditor involvement in due diligence should be enhanced,
and, at a minimum, restored to the level that prevailed in years past.
While, according to BMA and SIA, the AICPA repeatedly urged the
continuation of private negotiations between auditors and underwriters
with a view to limiting auditor participation in due diligence, BMA
and SIA argued that investors and regulators should have input in the
dialogue.
Letter Says Rationale Lacking.
Further, BMA and SIA contended that AICPA offered no rationale at
the meeting for its latest position on auditor participation in due
diligence. According to the letter, the AICPA instead advocated a
" 'standard' that can be used to press audit partners who are
still engaging in open due diligence discussions to consistently limit
their involvement in due diligence."
BMA and SIA told the SEC that they had made three main requests of
the AICPA: publicly to repudiate White Paper II, not to issue further
versions of White Paper II, and to establish a fair forum that
includes investors, regulators, and other interested parties.
"We see auditors as having a duty to fulfill in the
underwriter process. The duty is to be an active participant in the
process, not to remain silent," BMA's Snook told BNA.
Snook said that the AICPA is wrong when it says, essentially,
" 'There is nothing new here. We are just interpreting standards
and principles that already exist. … This is the way auditors
should have been behaving all around all along, and we're merely
providing clarification.' "
White Paper II "comes at a time when investors are looking for
better disclosure, more disclosure, a more rigorous process, not a
less rigorous one," Snook commented. "It's that formal
discussion between the auditor and the underwriter and the lawyers
involved in the process that should lead to a better understanding as
to whether the financials of the company are the complete, accurate
disclosure for the company at that point in time." However,
according to the white paper, what auditors should say to underwriters
is, " 'Here are the financials, take them or leave them,' "
Snook said.
Separately, the Financial Reporting Committee of the Association of
the Bar of the City of New York Sept. 30 wrote a letter to the AICPA
Center for Public Company Audit Firms arguing that the draft white
paper adopts an approach that "inappropriately marginalizes"
the auditor's role as a key participant in the due diligence process.
The committee called for a roundtable involving all interested parties
under the auspices of the SEC and the PCAOB.
The BMA-SIA letter to the SEC is posted at
http://www.bondmarkets.com/assets/files/WP2_Oct11MtgLtrtoSEC.pdf. The
AICPA's draft white paper of Aug. 23 is posted on the Bond Market
Association's Web site at
http://www.bondmarkets.com/assets/files/AICPADraftWhitePaperII&Cover-08-23-2005.pdf.
The BMA-SIA letter of Oct. 6 is posted at
http://www.bondmarkets.com/assets/files/SIA-TBMA_WP2_Letter-6Oct2005.pdf
and
http://www.sia.com/2005_comment_letters/pdf/SIATBMA106Letter.pdf.
By Rachel McTague