§ 78j-1. — Audit requirements.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 15USC78j-1]
TITLE 15--COMMERCE AND TRADE
CHAPTER 2B--SECURITIES EXCHANGES
Sec. 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) of this section 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
If a registered public accounting firm resigns from an
engagement under paragraph (3)(A), the firm shall, not later than 1
business day following the failure by the issuer to notify the
Commission under paragraph (3), furnish to the Commission a copy of
the report of the firm (or the documentation of any oral report
given).
(c) Auditor liability limitation
No registered public accounting firm shall be liable in a private
action for any finding, conclusion, or statement expressed in a report
made pursuant to paragraph (3) or (4) of subsection (b) of this section,
including any rule promulgated pursuant thereto.
(d) Civil penalties in cease-and-desist proceedings
If the Commission finds, after notice and opportunity for hearing in
a proceeding instituted pursuant to section 78u-3 of this title, that a
registered public accounting firm has willfully violated paragraph (3)
or (4) of subsection (b) of this section, the Commission may, in
addition to entering an order under section 78u-3 of this title, impose
a civil penalty against the registered public accounting firm and any
other person that the Commission finds was a cause of such violation.
The determination to impose a civil penalty and the amount of the
penalty shall be governed by the standards set forth in section 78u-2 of
this title.
(e) Preservation of existing authority
Except as provided in subsection (d) of this section, nothing in
this section shall be held to limit or otherwise affect the authority of
the Commission under this chapter.
(f) Definitions
As used in this section, the term ``illegal act'' means an act or
omission that violates any law, or any rule or regulation having the
force of law. As used in this section, the term ``issuer'' means an
issuer (as defined in section 78c of this title), the securities of
which are registered under section 78l of this title, or that is
required to file reports pursuant to section 78o(d) of this title, or
that files or has filed a registration statement that has not yet become
effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and
that it has not withdrawn.
(g) Prohibited activities
Except as provided in subsection (h) of this section, 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
A registered public accounting firm may engage in any non-audit
service, including tax services, that is not described in any of
paragraphs (1) through (9) of subsection (g) of this section for an
audit client, only if the activity is approved in advance by the audit
committee of the issuer, in accordance with subsection (i) of this
section.
(i) Preapproval requirements
(1) In general
(A) Audit committee action
All auditing services (which may entail providing comfort
letters in connection with securities underwritings or statutory
audits required for insurance companies for purposes of State
law) and non-audit services, other than as provided in
subparagraph (B), provided to an issuer by the auditor of the
issuer shall be preapproved by the audit committee of the
issuer.
(B) De minimus 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 nonaudit
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
Approval by an audit committee of an issuer under this
subsection of a non-audit service to be performed by the auditor of
the issuer shall be disclosed to investors in periodic reports
required by section 78m(a) of this title.
(3) Delegation authority
The audit committee of an issuer may delegate to 1 or more
designated members of the audit committee who are independent
directors of the board of directors, the authority to grant
preapprovals required by this subsection. The decisions of any
member to whom authority is delegated under this paragraph to
preapprove an activity under this subsection shall be presented to
the full audit committee at each of its scheduled meetings.
(4) Approval of audit services for other purposes
In carrying out its duties under subsection (m)(2) of this
section, if the audit committee of an issuer approves an audit
service within the scope of the engagement of the auditor, such
audit service shall be deemed to have been preapproved for purposes
of this subsection.
(j) Audit partner rotation
It shall be unlawful for a registered public accounting firm to
provide audit services to an issuer if the lead (or coordinating) audit
partner (having primary responsibility for the audit), or the audit
partner responsible for reviewing the audit, has performed audit
services for that issuer in each of the 5 previous fiscal years of that
issuer.
(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
It shall be unlawful for a registered public accounting firm to
perform for an issuer any audit service required by this chapter, if a
chief executive officer, controller, chief financial officer, chief
accounting officer, or any person serving in an equivalent position for
the issuer, was employed by that registered independent public
accounting firm and participated in any capacity in the audit of that
issuer during the 1-year period preceding the date of the initiation of
the audit.
(m) Standards relating to audit committees
(1) Commission rules
(A) In general
Effective not later than 270 days after July 30, 2002, the
Commission shall, by rule, direct the national securities
exchanges and national securities associations to prohibit the
listing of any security of an issuer that is not in compliance
with the requirements of any portion of paragraphs (2) through
(6).
(B) Opportunity to cure defects
The rules of the Commission under subparagraph (A) shall
provide for appropriate procedures for an issuer to have an
opportunity to cure any defects that would be the basis for a
prohibition under subparagraph (A), before the imposition of
such prohibition.
(2) Responsibilities relating to registered public
accounting firms
The audit committee of each issuer, in its capacity as a
committee of the board of directors, shall be directly responsible
for the appointment, compensation, and oversight of the work of any
registered public accounting firm employed by that issuer (including
resolution of disagreements between management and the auditor
regarding financial reporting) for the purpose of preparing or
issuing an audit report or related work, and each such registered
public accounting firm shall report directly to the audit committee.
(3) Independence
(A) In general
Each member of the audit committee of the issuer shall be a
member of the board of directors of the issuer, and shall
otherwise be independent.
(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
The Commission may exempt from the requirements of
subparagraph (B) a particular relationship with respect to audit
committee members, as the Commission determines appropriate in
light of the circumstances.
(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
Each audit committee shall have the authority to engage
independent counsel and other advisers, as it determines necessary
to carry out its duties.
(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, Sec. 10A, as added Pub. L. 104-67,
title III, Sec. 301(a), Dec. 22, 1995, 109 Stat. 762; amended Pub. L.
107-204, title II, Secs. 201(a), 202-204, 205(b), (d), 206, title III,
Sec. 301, July 30, 2002, 116 Stat. 771-775.)
References in Text
This chapter, referred to in subsecs. (a), (b)(1), (e), (g), (k),
and (l), was in the original ``this title''. See References in Text note
set out under section 78a of this title.
The Securities Act of 1933, referred to in subsec. (f), is title I
of act May 27, 1933, ch. 38, 48 Stat. 74, as amended, which is
classified generally to subchapter I (Sec. 77a et seq.) of chapter 2A of
this title. For complete classification of this Act to the Code, see
section 77a of this title and Tables.
Amendments
2002--Subsec. (a). Pub. L. 107-204, Sec. 205(b)(1), substituted ``a
registered public accounting firm'' for ``an independent public
accountant'' in introductory provisions.
Subsec. (b)(1). Pub. L. 107-204, Sec. 205(b)(2), (4)(A), in
introductory provisions, substituted ``the registered public accounting
firm'' for ``the independent public accountant'' and ``the firm'' for
``the accountant''.
Subsec. (b)(1)(B). Pub. L. 107-204, Sec. 205(b)(4)(B), substituted
``such firm'' for ``such accountant''.
Subsec. (b)(2). Pub. L. 107-204, Sec. 205(b)(2), (4)(A), (B), in
introductory provisions, substituted ``the firm'' for ``the
accountant'', ``such firm'' for ``such accountant'', and ``the
registered public accounting firm'' for ``the independent public
accountant'' and, in concluding provisions, substituted ``the registered
public accounting firm'' for ``the independent public accountant''.
Subsec. (b)(3). Pub. L. 107-204, Sec. 205(b)(2), substituted ``the
registered public accounting firm'' for ``the independent public
accountant'' wherever appearing in introductory provisions.
Subsec. (b)(4). Pub. L. 107-204, Sec. 205(b)(1), (4)(A), (C),
substituted ``a registered public accounting firm'' for ``an independent
public accountant'', ``the firm'' for ``the accountant'', and ``the
report of the firm'' for ``the accountant's report''.
Subsec. (c). Pub. L. 107-204, Sec. 205(b)(3), substituted ``No
registered public accounting firm'' for ``No independent public
accountant''.
Subsec. (d). Pub. L. 107-204, Sec. 205(b)(1), (2), substituted ``a
registered public accounting firm'' for ``an independent public
accountant'' and ``the registered public accounting firm'' for ``the
independent public accountant''.
Subsec. (f). Pub. L. 107-204, Sec. 205(d), substituted
``Definitions'' for ``Definition'' in heading and inserted at end ``As
used in this section, the term `issuer' means an issuer (as defined in
section 78c of this title), the securities of which are registered under
section 78l of this title, or that is required to file reports pursuant
to section 78o(d) of this title, or that files or has filed a
registration statement that has not yet become effective under the
Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not
withdrawn.''
Subsecs. (g), (h). Pub. L. 107-204, Sec. 201(a), added subsecs. (g)
and (h).
Subsec. (i). Pub. L. 107-204, Sec. 202, added subsec. (i).
Subsec. (j). Pub. L. 107-204, Sec. 203, added subsec. (j).
Subsec. (k). Pub. L. 107-204, Sec. 204, added subsec. (k).
Subsec. (l). Pub. L. 107-204, Sec. 206, added subsec. (l).
Subsec. (m). Pub. L. 107-204, Sec. 301, added subsec. (m).
Effective Date
Section 301(b) of Pub. L. 104-67 provided that: ``The amendment made
by subsection (a) [enacting this section] shall apply to each annual
report--
``(1) for any period beginning on or after January 1, 1996, with
respect to any registrant that is required to file selected
quarterly financial data pursuant to the rules or regulations of the
Securities and Exchange Commission; and
``(2) for any period beginning on or after January 1, 1997, with
respect to any other registrant.''
Construction
Section 203 of Pub. L. 104-67 provided that: ``Nothing in this Act
[see Short Title of 1995 Amendment note set out under section 78a of
this title] or the amendments made by this Act shall be deemed to create
or ratify any implied private right of action, or to prevent the
Commission, by rule or regulation, from restricting or otherwise
regulating private actions under the Securities Exchange Act of 1934 [15
U.S.C. 78a et seq.].''
Section Referred to in Other Sections
This section is referred to in sections 78l, 7231, 7233 of this
title; title 18 section 1520.
