October 15, 2015

DOJ Eases Yates Memo Cooperation Credit Requirements

Assistant Attorney General Leslie Caldwell has – seemingly appropriately – softened the DOJ’s recently issued updated guidance focused on individual accountability for corporate misconduct. According to the widely reported, so-called Yates Memo (which Broc blogged about last month), in order to qualify for any cooperation credit, companies must (among other things) provide to the DOJ “all relevant facts relating to the individuals responsible for the misconduct.” In a speech announcing the new policy, Deputy Attorney General Sally Yates elaborated:

Effective immediately, we have revised our policy guidance to require that if a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct.  It’s all or nothing.  No more picking and choosing what gets disclosed.  No more partial credit for cooperation that doesn’t include information about individuals.

Presumably in response to the backlash, and confusion and uncertainty, about the implications of this aspect of the guidance, according to the WSJ, Assistant Attorney General Caldwell subsequently clarified in remarks before the Global Investigative Review conference in late September that, effectively, companies need only share the information they have and – provided they have conducted an adequate investigation – they will still be eligible for cooperation credit even if they come up empty-handed as to culpable individuals:

Companies seeking cooperation credit “have to work affirmatively” to identify relevant information about culpable individuals and they can’t just disclose general misconduct without identifying the people behind the misconduct, said Ms. Caldwell, but she acknowledged that a company can’t be expected to provide what it doesn’t have, and that some investigations just don’t bear fruit.

“When a company is truly unable to identify culpable individuals, even after an appropriately tailored, careful, thorough investigation, but [it] still provides the government with all the relevant facts, and otherwise assists us in obtaining the relevant evidence, the company will still be eligible for cooperation credit,” she said.

See also this WSJ article noting the DOJ’s current focus on “bigger, higher impact [bribery] cases,” this blog discussing internal audit concerns with the DOJ’s new guidance, this blog addressing the governance implications of the guidance, and oodles of memos in our “White Collar Crime” Practice Area.

Stronger Connection Between Auditors & Accounting Employees = Better Audit Quality

Companies with a larger proportion of alumni from their current audit firm among their lower level accounting employees are purportedly significantly less likely to issue financial misstatements and have lower absolute abnormal accruals – so concludes this new paper reflecting the results of a study that examined whether alumni affiliations between companies’ auditors and accounting employees impact audit quality, as measured by financial misstatements and abnormal accruals.

Using the two key measurables of “alumni affiliations” (i.e., accounting employess who previously worked for their companies’ current audit firms) and audit quality based on the two commonly used proxies of financial material misstatements and absolute abnormal accruals, the results suggest that the stronger the connection between auditors and accounting employees, the better the audit quality.

Importantly, however, audit quality varies by accounting employee position level. Strong auditor alumni affiliations among lower level accounting employees have significantly positive effects on audit quality in terms of both reducing egregious misreporting (misstatements) and within GAAP earnings management (abnormal accruals), while alumni affiliations with auditors among middle management only reduce the likelihood of misstatement and, among upper management, only marginally restrain earnings management. The study’s authors surmise that this variability by position level is based on the fact that lower level accounting employees are likely to enhance audit quality given their previous working experience with the auditor (as further discussed in the paper), but have few incentives or opportunities to reduce it.

Given that hiring accounting employees from the company’s current audit firm is fairly common – and the close and ongoing interaction between the audit firm and the company’s accounting employees throughout the year (and during the audit process in particular) – the study’s findings are worth consideration.   

See also this FEI articleand heaps of additional resources in our “Auditor Independence,” Auditor Engagement,” and Auditing Process” Practice Areas.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Cybersecurity Tops Director & GC Concerns
– Study: Director Tenure Counterbalances CEO Authority
– Audit Committee Collaboration Releases External Auditor Assessment Tool
– DOJ Furthers Transparency on Corporate Cooperation
– Cybersecurity Preparedness

– by Randi Val Morrison