SW Legal studies in Business

SEC's Failure to State Clear Standards Means Proceedings Must Be Dropped
Description An appeals court reviewing an SEC finding that accountants had engaged in improper professional conduct held that since the SEC failed to articulate a clear standard that could be understood, the proceedings against the accountants had to be dropped.
Topic Accountant's Liability
Key Words Improper Professional Conduct; GAAP; SEC
C A S E   S U M M A R Y
Facts Two accountants at Coopers & Lybrand were found by the SEC to have engaged in "improper professional conduct" in violation of SEC Rule 2(e)(1)(ii) for their work on audits performed for a publicly traded company. The SEC asserted that they had not complied with generally accepted accounting principles (GAAP) in their treatment of costs of research and development. They were suspended for five years from "practicing before the Commission." The accountants appealed the finding and the appeals court remanded the case to the SEC, holding that the SEC Rule regarding improper professional conduct was not adequately explained. The SEC affirmed its earlier holding. The accountants again appealed.
Decision Remanded with instructions. The Commission's opinion regarding its Rule for improper professional conduct "manages to both embrace and reject standards of (1) recklessness, (2) negligence and (3) strict liability-or so a careful (and intrepid) reader could find." The Commission's "opinion yields no clear and coherent standard for violations of Rule 2 (e)(1)(ii). Although we owe 'substantial deference to an agency's interpretation of its own regulations,' we cannot defer to an agency when 'we are at a loss to know what kind of standard it is applying or how it is applying that standard to this record.'" Since this case has drug on for many years and the SEC has repeatedly failed to articulate a clear standard for violations of its Rule, the Commission is instructed to dismiss the charges.
Citation Checkosky v. Securities and Exchange Commission, 139 F.3d 221 (D.C. Cir., 1998)

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