January 1999 Issue


Under Rule 102(e) of the Rules of Practice, accountants, lawyers, and other professionals may be censured, suspended, or barred from practicing before the SEC. Rule 102(e) is a "means to ensure that those professionals, on whom the [SEC] relies heavily in the performance of its statutory duties, perform their tasks diligently and with a reasonable degree of competence." After notice and an opportunity for a hearing, the SEC can impose a sanction upon a professional who it finds 1) to not possess the requisite qualifications to represent others; 2) to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct; or 3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the Federal securities laws, rules, or regulations.

In a recent opinion relating to an SEC enforcement action against two accountants (Checkosky v. SEC), the Court of Appeals for the District of Columbia concluded that the SEC had not clearly articulated when an accountant would be deemed to have engaged in improper professional conduct. To address the court's concerns, the SEC has adopted an amendment to clarify the "standard for determining when accountants engage in 'improper professional conduct' under Rule 102(e)(1)(ii)." The amendment delineates three types of improper conduct:

* Intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards

* A single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted

* Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the SEC.

The term "applicable professional standards" refers to GAAP, GAAS, the AICPA code of professional conduct, and SEC regulations, as well as "generally accepted standards routinely used by accountants in the preparation of statements, opinions, or other papers filed" with the SEC.

The amendment was effective on November 25, 1998. The new definition of improper professional conduct will be applied in all cases considered after the effective date, regardless of when the conduct in question occurred. The amendment will not be applicable to cases that were in trial before an administrative law judge as of November 25, 1998.

The text of the amendment (Release 33-7593) is available on the SEC's website (www.sec.gov/rules/final/33-7593.html). *

Source: Deloitte & Touche Review, November 9, 1998

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