On May 20, 2003, the Securities and Exchange Commission published a release discussing the adoption of new rules in response to Section 303 of the Sarbanes-Oxley Act of 2002. The new rules prohibit officers and directors of an issuer, and persons acting under their direction, from taking any action to coerce, manipulate, mislead, or fraudulently influence the auditor of the issuer's financial statements if that person knew or should have known that such action, if successful, could result in rendering the financial statements materially misleading. The new rules take effect on June 27, 2003. The release can be found at: http://www.sec.gov/rules/final/34-47890.htm
The new rules, in combination with the existing rules under Regulation 13B-2, are designed to ensure that management makes open and full disclosures to, and has honest discussions with, the auditor of the issuer's financial statements. The rules prohibit the officers and directors of an issuer, and other persons acting under their direction, from subverting the auditor's responsibilities to conduct a diligent audit of the issuer's financial statements and to provide a true report of the auditor's findings.
During the comment period, Dorsey & Whitney LLP expressed the concern that the proposed rules could create substantial uncertainty surrounding the business relations between public companies and broker-dealers retained by those companies to provide underwriting and other investment banking services that involve analyzing or assessing audited financial statements in connection with corporate finance transactions. Apart from the impossibility of knowing for certain whether an investment banker's actions "could, if successful," render the company's financial statements materially misleading, broker-dealers must discern for themselves what constitutes adequate due diligence sufficient to satisfy the Commission that they are not "unreasonable in not knowing" that their actions could inappropriately influence the company's auditor.
The rules were adopted substantially unchanged. Therefore, we believe that investment banking firms should be cautious in their dealings and discussions with their client companies' auditors in order to ensure that their activities are not erroneously construed as seeking to unduly influence accounting treatments or characterizations with respect to those companies' financial statements.
Dorsey & Whitney's comment letter can be found at: http://www.sec.gov/rules/proposed/s73902/bjcatalano1.htm#P45_15122
For further information, please contact the Dorsey & Whitney attorney with whom you work.