“Removing auditors from the underwriting process would be like removing navigators from airplanes,” said Marc Lackritz, President of SIA. “Auditors provide a valuable and unique source of independent information which can be pivotal to the decision making process of investors.”
“A lack of meaningful participation by auditors in the due diligence process risks seriously harming investors,” said Micah S. Green, President and CEO of the Bond Market Association. “This directly contradicts long-standing practice and significantly undercuts the Sarbanes-Oxley reforms and related rulemakings which have more recently sought to improve financial disclosure and strengthen—not weaken—investor protection.”
The due diligence process during which investment banks review the financial health of entities issuing securities involves a detailed review of financial statements and other company information, probing questions of management and, where appropriate, the seeking of independent information and verification from third parties such as auditors, customers, suppliers and others. For years, the typical due diligence process has included a full, frank, unrestricted and meaningful discussion with auditors, undertaken with the support and consent of issuers.
However, under the proposed new guidance from the American Institute of Certified Public Accountants, auditors would be effectively silenced on a number of critical subjects. The draft prohibits auditors from discussing internal financial controls, awareness of fraud or illegal acts and specific items in financial statements. Auditors are even authorized to remain silent in the face of management misstatements. According to the draft, auditors have no duty to correct any management misstatement made to the underwriters in the auditors’ presence.
“The draft subverts long-standing due diligence practices,” commented Mr. Green. “Securities law reflects a basic belief that due diligence is a key element in ensuring good disclosure.”
“This essentially eliminates an audit firm’s participation in the due diligence process for securities offerings,” said Mr. Lackritz. “With a single proposal, auditors are unilaterally amputating one of the key legs supporting the capital markets—a dramatic setback for investors who are best served by additional disclosure.”
The Bond Market Association and the Securities Industry Association also strongly protest the backdoor method under which the Institute is trying to issue its guidance. There is absolutely no indication drafts of the proposals have been sent to issuer groups, outside directors or investors which is evidence of a disregard for the interests of investors and other interested parties.
