In its first public Policy Statement regarding the treatment of cooperation in investigations, the Public Company Accounting Oversight Board (PCAOB or Board) provided guidance on how it will consider a firm’s or auditor’s “extraordinary cooperation,” which goes above the level of cooperation that is otherwise legally required, in determining the outcome of an investigation. In the Policy Statement, which includes many of the same themes set forth in the SEC’s Seaboard Report, the PCAOB identified categories and examples of conduct that would be considered and the credit that may be afforded such extraordinary cooperation in the determination of the outcome of the investigation. The PCAOB explained that increasing extraordinary cooperation through such incentives may shorten investigations and reduce the burdens to the Board’s resources. This maximization of the Board’s time and resources will allow the Board to address possible audit or other violations sooner, reduce the risk that such violative conduct will be repeated to the increased detriment of investors and assist the Board in identifying inaccurate audit reports.

In the Policy Statement, the PCAOB defines “extraordinary cooperation” as voluntary and timely action that contributes to the mission of the Board. The PCAOB identifies the following three types of cooperation that might merit cooperation credit and, in its Statement, sets forth example conduct that might fall within these categories.

  • Self-reporting: full disclosure before the Board or another regulator becomes aware of the conduct, with earlier self-reporting considered more valuable. However, self-reporting required by legal or regulatory obligations, such as Section 10A of the Exchange Act’s requirement that an auditor report a client’s illegal acts, is not eligible for cooperation credit.
  • Remedial or corrective action: meaningful actions designed to reduce the likelihood and risk that similar violations will occur and to correct the violative conduct. Such conduct must be voluntary, so credit would not be applied to those improvements made in response to quality control criticisms or the Board’s identification of defects during inspections.
  • Substantial assistance: providing information or documents during the Board’s investigative processes or to other law enforcement authorities that might not have been discovered absent that cooperation or that goes beyond information sought by requests or regulatory requirements, including, for example, information uncovered during an internal investigation.

Credit for extraordinary cooperation may be reflected by:

  • reduced charges and sanctions imposed in settlement;
  • language in settlement documents noting the cooperation and its positive effect on final settlement; and
  • in exceptional cases, no disciplinary action at all.

The specific facts and circumstances of each case will determine whether and how such credit should be applied. As the Board seeks to balance the tension between crediting extraordinary cooperation and maintaining accountability for violative conduct, providing extraordinary cooperation is only one factor in the determination of the appropriate disciplinary response to the violative conduct.

With this recent public guidance, the PCAOB, much like other law enforcement authorities with cooperation policies, including the Department of Justice and the Securities and Exchange Commission, is taking a step in the right direction to encourage increased cooperation in a time when cases are only becoming larger and more complicated and government resources more constrained. It will be important to look to upcoming PCAOB settlement agreements to see the level of cooperation that is needed to qualify as “extraordinary cooperation” and how tangible the corresponding credit is, as well as to determine how the PCAOB will handle issues not addressed in the Policy Statement, such as whether it will seek or how it will treat the waiver of the attorney-client privilege.

Helpful Links

  • PCAOB’s Cooperation Policy

http://pcaobus.org/Enforcement/Documents/Release_2013_003.pdf

  • SEC’s Cooperation Policy and Initiative and Seaboard Report

http://www.sec.gov/rules/policy/2010/34-61340.pdf

http://www.sec.gov/spotlight/enfcoopinitiative.shtml

https://www.sec.gov/litigation/investreport/34-44969.htm

  • DOJ’s Principles of Federal Prosecution of Business Organizations

http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/28mcrm.htm