Audit committee and auditor oversight update

In an October 9 speech (available here) to the Securities Enforcement Forum, SEC Chair Mary Jo White, expanding on earlier public statements, outlined her philosophy regarding the Commission’s enforcement program. Her theme was that SEC enforcement would “strive to be everywhere” and would not ignore minor violations of the securities laws because “even the smallest infractions have victims” and “the smallest infractions are very often just the first step toward bigger ones down the road.” Ms. White analogized this approach to the “broken windows” theory of policing employed by former New York City Mayor Rudy Giuliani. She assured the audience that, under her leadership, the Commission would pursue “[n]ot just the biggest frauds, but also violations such as control failures, negligence-based offenses, and even violations of prophylactic rules with no intent requirement.”
From an audit committee perspective, the most significant feature of the speech was the emphasis Chair White placed on gatekeepers. She stressed that the enforcement program would continue to focus on auditors because “auditors serve as critical gatekeepers – experts charged with making sure that the processes that companies use to prepare and report financial information are ones that are built on strength and integrity.” She noted that the Commission had launched an initiative called “Operation Broken Gate” designed “to identify auditors who neglect their duties and the required auditing standards” and to “prob[e] the quality of audits and determin[e] whether the auditors missed or ignored red flags; whether they have proper documentation; and, whether they followed their professional standards.”
With respect to directors’ gatekeeper responsibilities, Chair White commented only on investment company boards. In that context, she responded to the argument that enforcement actions against directors might discourage board service “for fear of being second-guessed or blamed for every issue that arises.” While she acknowledged the concern, Chair White stated: “But this is my response: first, being a