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THE AMERICAN LAW INSTITUTE
Continuing Legal Education
Accountants' Liability 2015:
Confronting Enforcement and Litigation Risks
October 1 - 2, 2015
Washington, D.C.
Investigating Possible Illegal Acts:
Auditor’s Obligations Under Section 10A of the Securities Exchange Act
By
Caryn L. Jacobs
Winston & Strawn LLP
Chicago, Illinois
Andrew J. Morris
Morvillo LLP
Washington, D.C.
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Investigating Possible Illegal Acts:
Auditor’s Obligations Under Section
10A of the Securities Exchange Act
Caryn L. Jacobs
WINSTON & STRAWN LLP
Chicago, IL 60601
312-558-6168
cjacobs@winston.com
Andrew J. Morris
MORVILLO LLP
Washington, DC 20036
202-803-5850
amorris@morvillolaw.com
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Overview Of
Section 10A
Of The Securities
Exchange Act
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Section 10A: An Overview
Section 10A requires auditors to take certain
actions if they detect or become aware of
“information indicating that an illegal act” has or
may have occurred. See 15 USC 78j-1.
• Action required “whether or not” potential
illegal act is “perceived to have a material
effect on the financial statements.”
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Section 10A: An overview
Section 10A requires the auditor to:
• Determine whether it is “likely” an illegal act
occurred. 15 U.S.C. §78j-1(b)(1)(A)(i).
• If so, evaluate the possible effect on the
financial statements. 15 U.S.C. §78j-1(b)(1)(A)(ii).
– Such evaluation must include consideration of possible
fines, penalties, and damages
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Section 10A: An overview
Section 10A requires the auditor to take the
following steps “as soon as practicable” unless
effect of illegal act is “clearly inconsequential”:
• Inform appropriate level of management and
“assure” that the audit committee is
“adequately informed”. 15 U.S.C. §78j1(b)(1)(B).
• No definition of what is “clearly
inconsequential.”
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Section 10A: An overview
Section 10A requires the auditor to report
directly to the Board if:
• The effect of illegal act is material; company’s
senior management fails to take “timely and
appropriate remedial actions”; and such
failure is expected to warrant departure from
standard auditor’s report or resignation. 15
U.S.C. §78j-1(b)(2).
– Audit standards, such as SAB 99, govern “materiality.”
– This notice by auditor triggers client’s duty to notify SEC.
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