FOR IMMEDIATE RELEASE 98-91 SEC Defines "Improper Professional Conduct" By Accountants Washington, D.C., September 23, 1998 -- 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. # # #