knowledge of a client’s improper activity. It has also become a common issue for CPAs. The basic concept is that the professional having become aware of a client’s improper activity (such as employee theft) withdraws from the representation and notifies the proper authority of their withdrawal. The withdrawal is done in such a way that the authorities are alerted to the fact that there may be a problem. If the client has caused the professional to give their professional opinion on some false information or pretenses the withdrawal will often be accompanied by a withdrawal of the opinion.
This is most often noticed in large public company settings because of the public scrutiny that can essentially arise in almost any situation. Further, the Securities Exchange Commission (“SEC”), particularly through the Sarbanes-Oxley Act of 2002 [“SOX”],has requirements, in certain circumstances, for a noisy withdraw. The SEC even has an Office of the Whistleblower. http://www.sec.gov/whistleblower
SOX requires that attorneys report “evidence of a material violation of securities law or breach of fiduciary duty” to the chief legal counsel or chief executive officer of the company. If there is no appropriate response then report to the board of directors or appropriate committee of the board of directors. This is referred to as “up the ladder”reporting. In addition, it is both a good practice and requirement to attempt to resolve the issues with the client before making a noisy withdrawal.
SOX requires a noisy withdrawal by an outside attorney if the company has not responded appropriately, the violation is ongoing or about to occur, and the likely result will be substantial injury to the investors. In this situation, the attorney has one day to withdraw, indicating that the withdrawal was “based on professional considerations,” and must disaffirm any statements the attorney has made to the SEC which may be false or misleading. In house attorneys must disaffirm but are not required to resign their employment.
An issue arises as to how one disaffirms a statement and what confidential client information may be disclosed. The SEC permits the disclosure of confidential information without the client’s consent. However, this rule is in conflict with various state rules. The important thing is to make the withdrawal and any disaffirmance while revealing as little confidential information as possible. It is quite possible that the intent can be accomplished without revealing any confidential information.
The SEC has expanded the requirement for noisy withdrawal to CPAs in certain circumstances as well. Without getting into all the details, investment advisors, who are qualified custodians, must have an audit. The auditor is required to notify the SEC within one business day of any material discrepancies and make a noisy withdrawal.
There are other circumstances in which a noisy withdrawal would likely be appropriate for both attorneys and accountants, and following the SEC rules would go a long way to demonstrate that an accountant or attorney handled the matter properly. The law in this area is still developing so if you find yourself in this situation, handle it very carefully.
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