Section 10A of the Securities and Exchange Act of 1934
requires reporting by auditors to the Securities and Exchange Commission (SEC)
when, during the course of a financial audit, an auditor detects likely illegal
acts that have a material impact on the financial statements and appropriate
remedial action is not being taken by management or the board of directors.
The Private Securities Litigation Reform Act of 1995
(Public Law 104- 67) added Section 10A to the Securities Exchange Act of 1934
(15 U. S. C. 78j- 1). Section 10A reporting requirements first became effective
for fiscal years beginning on or after January 1, 1996.
prepared a report in February 2000
and again in September 2003 at the request of Congress, regarding the
audit industry's compliance with Section 10A. The GAO also reported the
statistics for SEC enforcement actions under Section 10A.
The February 2000 report stated that six Section 10A
reports had been submitted by audit firms through December 14, 1999. Records
from the SEC's Office of the Chief Accountant show that during the period
December 15, 1999 through May 15, 2003 - four years of turmoil in the markets
and in the accounting industry - an additional 23 Section 10A reports were
From the inception of the 10A reporting requirement in
1996 through May 15, 2003, a total of 29 Section 10A reports were submitted to
the SEC. The reports cover a variety of potential illegal acts, including
improper revenue recognition, unusual capital transactions relating to stock
warrants, inadequate financial statement disclosures, and failure to disclose
expenses relating to stock options.
In the 2003 report, the AICPA attributed the low level of
10A reporting to the reasons they cited as stated in the 2000 GAO report: In
most cases, management or the board of directors, often with the participation
of internal or external counsel, took timely and appropriate action to address
a situation involving an illegal act when it was brought to their attention by
According to SEC officials in 2003, all Section 10A
reports from 1996 to 2003 were investigated. Of the 29 SEC registrants named in
the reports as of 2003, 10 were the subject of active SEC enforcement
investigations, 8 had actions brought against them by the SEC, and 11 reports
were closed without formal action being taken by the SEC.
Read this article in its entirety at the re: The Auditors, a blog
by Francine McKenna.
more information about LexisNexis products and solutions connect with us through
our corporate site.