15 USC 78j-1 - Audit requirements

U.S Code last checked for updates: May 02, 2024

§ 78j–1.

Audit requirements

(a)

In general

Each audit required pursuant to this chapter of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission—

(1)

procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;

(2)

procedures designed to identify related party transactions that are material to the financial statements or otherwise require disclosure therein; and

(3)

an evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year.

(b)

Required response to audit discoveries

(1)

Investigation and report to management

If, in the course of conducting an audit pursuant to this chapter to which subsection (a) applies, the registered public accounting firm detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred, the firm shall, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission—

(A)

(i)

determine whether it is likely that an illegal act has occurred; and

(ii)

if so, determine and consider the possible effect of the illegal act on the financial statements of the issuer, including any contingent monetary effects, such as fines, penalties, and damages; and

(B)

as soon as practicable, inform the appropriate level of the management of the issuer and assure that the audit committee of the issuer, or the board of directors of the issuer in the absence of such a committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of such firm in the course of the audit, unless the illegal act is clearly inconsequential.

(2)

Response to failure to take remedial action

If, after determining that the audit committee of the board of directors of the issuer, or the board of directors of the issuer in the absence of an audit committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of the firm in the course of the audit of such firm, the registered public accounting firm concludes that—

(A)

the illegal act has a material effect on the financial statements of the issuer;

(B)

the senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions with respect to the illegal act; and

(C)

the failure to take remedial action is reasonably expected to warrant departure from a standard report of the auditor, when made, or warrant resignation from the audit engagement;

the registered public accounting firm shall, as soon as practicable, directly report its conclusions to the board of directors.

(3)

Notice to Commission; response to failure to notify

An issuer whose board of directors receives a report under paragraph (2) shall inform the Commission by notice not later than 1 business day after the receipt of such report and shall furnish the registered public accounting firm making such report with a copy of the notice furnished to the Commission. If the registered public accounting firm fails to receive a copy of the notice before the expiration of the required 1-business-day period, the registered public accounting firm shall—

(A)

resign from the engagement; or

(B)

furnish to the Commission a copy of its report (or the documentation of any oral report given) not later than 1 business day following such failure to receive notice.

(4)

Report after resignation

(c)

Auditor liability limitation

(d)

Civil penalties in cease-and-desist proceedings

(e)

Preservation of existing authority

(f)

Definitions

(g)

Prohibited activities

Except as provided in subsection (h), it shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appropriate by the Commission) that performs for any issuer any audit required by this chapter or the rules of the Commission under this chapter or, beginning 180 days after the date of commencement of the operations of the Public Company Accounting Oversight Board established under section 7211 of this title (in this section referred to as the “Board”), the rules of the Board, to provide to that issuer, contemporaneously with the audit, any non-audit service, including—

(1)

bookkeeping or other services related to the accounting records or financial statements of the audit client;

(2)

financial information systems design and implementation;

(3)

appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

(4)

actuarial services;

(5)

internal audit outsourcing services;

(6)

management functions or human resources;

(7)

broker or dealer, investment adviser, or investment banking services;

(8)

legal services and expert services unrelated to the audit; and

(9)

any other service that the Board determines, by regulation, is impermissible.

(h)

Preapproval required for non-audit services

(i)

Preapproval requirements

(1)

In general

(A)

Audit committee action

(B)

De minimis exception

The preapproval requirement under subparagraph (A) is waived with respect to the provision of non-audit services for an issuer, if—

(i)

the aggregate amount of all such non-audit services provided to the issuer constitutes not more than 5 percent of the total amount of revenues paid by the issuer to its auditor during the fiscal year in which the non-audit services are provided;

(ii)

such services were not recognized by the issuer at the time of the engagement to be non-audit services; and

(iii)

such services are promptly brought to the attention of the audit committee of the issuer and approved prior to the completion of the audit by the audit committee or by 1 or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.

(2)

Disclosure to investors

(3)

Delegation authority

(4)

Approval of audit services for other purposes

(j)

Audit partner rotation

(k)

Reports to audit committees

Each registered public accounting firm that performs for any issuer any audit required by this chapter shall timely report to the audit committee of the issuer—

(1)

all critical accounting policies and practices to be used;

(2)

all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and

(3)

other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.

(l)

Conflicts of interest

(m)

Standards relating to audit committees

(1)

Commission rules

(A)

In general

(B)

Opportunity to cure defects

(2)

Responsibilities relating to registered public accounting firms

(3)

Independence

(A)

In general

(B)

Criteria

In order to be considered to be independent for purposes of this paragraph, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee—

(i)

accept any consulting, advisory, or other compensatory fee from the issuer; or

(ii)

be an affiliated person of the issuer or any subsidiary thereof.

(C)

Exemption authority

(4)

Complaints

Each audit committee shall establish procedures for—

(A)

the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and

(B)

the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.

(5)

Authority to engage advisers

(6)

Funding

Each issuer shall provide for appropriate funding, as determined by the audit committee, in its capacity as a committee of the board of directors, for payment of compensation—

(A)

to the registered public accounting firm employed by the issuer for the purpose of rendering or issuing an audit report; and

(B)

to any advisers employed by the audit committee under paragraph (5).

(June 6, 1934, ch. 404, title I, § 10A, as added Pub. L. 104–67, title III, § 301(a), Dec. 22, 1995, 109 Stat. 762; amended Pub. L. 107–204, title II, §§ 201(a), 202–204, 205(b), (d), 206, title III, § 301, July 30, 2002, 116 Stat. 771–775; Pub. L. 111–203, title IX, § 985(b)(3), July 21, 2010, 124 Stat. 1933.)

cite as: 15 USC 78j-1