On April 24, 2013, the Public Company Accounting Oversight Board (PCAOB or Board) issued a Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations (Policy Statement).1 The Policy Statement provides guidance concerning how the PCAOB may consider the effect of "extraordinary cooperation" in determining the disciplinary outcome of an investigation. Extraordinary cooperation includes self-reporting, remedial or corrective action, or substantial assistance in an investigation. If the Board determines that the subject of an investigation has provided "extraordinary cooperation" in a manner consistent with the Policy Statement, it may impose reduced charges or sanctions, include language in settlement documents noting the cooperation and its positive effect on settlement terms, or, in "exceptional" cases, bring no disciplinary action at all.
The Policy Statement makes it clear that the Board will credit only extraordinary cooperation. The Policy Statement also emphasizes that cooperation is required in every investigation (regardless of any potential credit) and notes that the obligation to cooperate is required pursuant to both the Sarbanes-Oxley Act and Board rules. The Policy Statement also notes that under the Sarbanes-Oxley Act and Board rules, non-cooperation may warrant disciplinary proceedings.2
The Role of Cooperation in PCAOB Investigations Prior to the Policy Statement
The Policy Statement states that the "policy articulated in this statement is generally consistent with the Board’s existing practices."3 Prior to the Policy Statement, the PCAOB has given credit for cooperation, although it has done so sparingly. For example, in In re Alan J. Goldberger, CPA and William A. Postelnik, CPA, one of the first settled PCAOB orders, the Board expressly stated that it took into account the Respondents’ self-reporting in determining that censure was the appropriate sanction against them. According to the settled Order, Respondents, together with the firm’s managing partner, altered audit workpapers and provided false and misleading information to PCAOB inspectors. Respondents self-reported their conduct to the Staff before the inspection commenced.4 In contrast to Goldberger and Postelnik’s censure, the PCAOB barred the firm’s managing partner (who did not self-report) from being an associated person of a registered public accounting firm.5
Accordingly, while the practical effects of the Policy Statement may not be substantial, it provides a standard framework by which those under investigation by the PCAOB may seek credit for extraordinary cooperation.6
Types of Extraordinary Cooperation
The Board has defined three areas that may be considered extraordinary cooperation, either considered in combination or in isolation: (1) self-reporting; (2) remedial or corrective action; and (3) substantial assistance in the Board’s investigative processes or to other law enforcement authorities. In each case, the PCAOB will only credit such cooperation if it is "voluntary and timely" as well as above and beyond compliance with legal or regulatory obligations.7
Self-reporting. Extraordinary cooperation in the form of self-reporting may be considered when a firm or individual makes a full disclosure of a violation to the PCAOB before the conduct comes to the attention of the Board or another regulator. The Policy Statement emphasizes that self-reporting is more valuable the earlier it is made. The Board will offer no credit for self-reporting when the reporting individual or entity was under a legal obligation to report the conduct (for example, the obligations under Section 10A(b) of the Securities Exchange Act of 1934).
Remedial or corrective action. Remedial or corrective action may result in credit when such action is "designed to reduce the likelihood and risk that similar violations will recur" or when it corrects violative conduct. Examples noted in the Policy Statement include (i) voluntary modification and improvement of quality controls or internal policies or procedures to prevent recurrence of the conduct; (ii) reassignment or limitation of the activities of those individuals responsible for the violations; (iii) termination or other discipline of such individuals; (iv) prompt notification to the audit client or its audit committee, and cooperation with the client so the client can take steps to comply with the securities laws; and (v) compensation to those adversely affected by the violations. The Policy Statement focuses on actions to be taken by an accounting firm and does not address how an individual could potentially provide extraordinary cooperation through remedial or corrective action.
Substantial assistance. The Board may give extraordinary cooperation credit to firms or individuals for substantial assistance in the Board’s investigative processes or to other law enforcement authorities. The substantial assistance must provide information and/or documents that may not have been discovered but for the cooperation or is beyond that sought by the Board’s requests. For example, the production of documents called for by a PCAOB accounting board demand or request will not be deemed substantial assistance. An accounting firm’s internal investigation into violative conduct, undertaken at the time the conduct was discovered, may be considered substantial assistance if the firm informs the PCAOB staff or other law enforcement authorities of the pertinent facts uncovered by the internal investigation.
The Board will consider the benefit of extraordinary cooperation on a case-by-case basis, and cooperation is simply one factor in its determination of appropriate discipline. Other factors the Board will consider include:
- The nature of the misconduct (including the responsible party’s mental state);
- The root cause(s) of the misconduct;
- Whether there were repeated violations or a pattern of misconduct;
- The duration of the misconduct;
- The individual or firm’s prior disciplinary history;
- The individual’s role in the violative conduct;
- The individual’s knowledge, education, training, experience, and position of responsibility;
- Whether firm supervisors and/or management directed, tolerated, or remained "willfully blind" to the violative conduct; and
- The extent of self-policing and the implementation of quality controls prior to the discovery of the violative conduct, including the establishment of effective compliance procedures, a whistleblower and complaint system, and an appropriate "tone at the top."8
The Policy Statement is intended to balance the tension between the Board’s interest in encouraging extraordinary cooperation in investigations with its need to hold firms and individuals accountable for misconduct. While it remains to be seen what practical effects the Policy Statement may have on PCAOB investigations, the statement provides useful guidance for firms and individuals responding to investigations into potential violations of the securities laws or auditing standards.