SEC Defines “Improper Professional Conduct” By Accountants

The Securities and
Exchange Commission today adopted an amendment to Rule 102(e) of
the Commission’s Rules of Practice that clarifies when
accountants engage in “improper professional conduct.”

Under Rule 102(e), the Commission can censure, suspend or bar
certain professionals, including accountants, for various types
of misconduct, including intentional conduct, highly unreasonable
conduct and repeated instances of negligent conduct.

“Every day, investors rely on the accuracy of financial
statements when making investment decisions. Accountants play a
vital role in the financial reporting process. Today’s action
sends a strong and clear message that accountants must meet their
professional obligations and that incompetence won’t be
tolerated,” said Arthur Levitt, Chairman of the Securities and
Exchange Commission.

Added Harvey J. Goldschmid, General Counsel of the Securities and
Exchange Commission:  “By defining ‘improper professional
conduct’ under Rule 102(e), the Commission acts to protect the
integrity of its processes and thereby to maintain the investing
public’s confidence in the financial reporting process.  At the
same time, the Commission has provided a clear and fair standard
for those accountants who practice before the Commission.”

Attached is a fact sheet outlining the basic elements of the rule
that the Commission adopted today.

                             #  #  #
                                
                 Final Amendment to Rule 102(E)
                           Fact Sheet
                       September 23, 1998

The Securities and Exchange Commission adopted an amendment to
Rule 102(e) of the Commission’s Rules of Practice that clarifies
when accountants engage in “improper professional conduct.”
Under Rule 102(e), the Commission can censure, suspend or bar
persons who appear or practice before the Commission.

The Commission’s proposal to amend Rule 102(e) was prompted by a
recent judicial decision by the U.S. Court of Appeals for the
District of Columbia Circuit concerning the conduct of two
accountants.  The court found that the Commission’s opinions in
that case had not articulated clearly the “improper professional
conduct” element of the rule.

To address the court’s concerns, the Commission published for
comment a proposed amendment to Rule 102(e) on June 18, 1998.
The Commission received over 150 comment letters on the proposed
amendment.  After considering these comments, the Commission is
adopting the following definition:

With respect to persons licensed to practice as accountants,
“improper professional conduct” under 201.102(e)(1)(ii) means:

   (A)  Intentional or knowing conduct, including  reckless
   conduct, that results in a violation of  applicable
   professional standards; or
   
   (B)  Either of the following two types of  negligent conduct:

      (1)  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.
      
      (2)  Repeated instances of unreasonable conduct, each
      resulting in a violation of applicable professional
      standards, that indicate a lack of competence to practice
      before the Commission.
      
                             #  #  #

           Opening Statement of Chairman Arthur Levitt
               Securities and Exchange Commission
                     Open Commission Meeting
                       September 23, 1998

Good morning.  This is an open meeting of the Securities and
Exchange Commission.  Today, we decide whether to adopt a final
rule defining the circumstances under which the Commission will
discipline accountants.

Accountability, disclosure and transparency have long been
hallmarks of America’s capital markets.  For nearly 70 years,
these living principles have made our markets the most liquid,
resilient and innovative in the world.  The accounting profession
has been at the very heart of this country’s financial success.

Investors rely on the professionalism of accountants to ensure
that financial reporting is proper and reliable. Without their
determined and diligent efforts, investors would stand
unprotected, uninformed, and unaware of misleading or deceptive
disclosures by those who may seek to distort financial reality.
Simply put, accountants give investors -- and by extension, the
markets -- peace of mind.

This is an awesome responsibility.  The basic question before us
today is quite simple: should the SEC, and the public, expect
professional standards for accountants to be commensurate with
their responsibility?  The answer, I believe, must be yes.

I believe that taking disciplinary action against an accountant
for highly unreasonable conduct is both fair and appropriate.
Investors deserve to know that incompetence and sloppiness won’t
be tolerated.  Our expectations of professional behavior
shouldn’t be relegated to the lowest common denominator.
Shouldn’t the veracity and integrity of the numbers be explicitly
equivalent to the competency and practices of the accountants who
are behind them?  Isn’t that what professionalism is all about?

No one should interpret today’s action as impugning the integrity
of a noble profession.  The vast majority of America’s 400,000
certified public accountants are skilled and dedicated
individuals who uphold the standards of independence and
integrity.  And we have no intention of sanctioning those who
simply make a common, harmless mistake.  But neither the
profession as a whole, nor our markets can absorb the damage done
to public trust by the few who intentionally or incompetently
abuse the system.

Some, including my esteemed colleague Commissioner Johnson, have
argued that the Commission should be required to show a
professional intentionally cooked the books before we could bring
any action against them.  But I worry that such a standard would
send the wrong message.  Investors and our markets might fairly
wonder why we are unable, or unwilling, to hold professionals
accountable for conduct that has no place in any profession --
let alone accounting.

This rule, if adopted, will go a long way to reminding those who
practice before the Commission that such conduct can not and will
not be tolerated.

As I said earlier, for almost all accountants, this standard of
conduct is no higher than what they already demand from
themselves.  But, to those few who flout the standards of
professional decency, who violate the values of integrity and
credibility and who fail to meet the basic threshold of
competency, we must send a strong and clear message.

I want to thank everyone involved in this process for the timely
and deliberate manner in which this important rule was carefully
considered.  While no doubt some may have preferred a longer
period in which to contemplate this issue, it would have been
intolerable to leave investors and our markets unprotected
without the shield of clear standards of professional conduct.

Lastly, I want to thank the staff for all of their hard work on
this final rule.  Without their invaluable work, it would have
been impossible to have had such a thoughtful and productive
debate -- both in the Commission as well as in the accounting
industry.