Securities Litigation

The SEC this week issued cease-and-desist orders against eight auditors, fining them $140,000 collectively, for violating auditor independence rules by preparing the very broker-dealer financials they were to audit. Broker-dealer auditors are bound by auditor-independence criteria established under Reg. S-X. By using BD-provided documents to prepare the client's financial statements, the sanctioned firms "essentially put themselves in the position of auditing their own work," said the SEC's release, here. The Release is another in a growing trend in which Enforcement "batches" smaller administrative enforcement actions into sweeps, with group announcements. The Commission has had auditor independence as a targeted issue under its "Broken Gates" initiative. Similar to the more well-known "Broken Windows" enforcement (policing) policy (which opines that ignoring smaller infractions encourages lawlessness), the "Broken Gates" initiative focuses on accountants, lawyers, compliance professionals and others in gate-keeping roles with duties that help preserve or improve standards of conduct in the industry. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)