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Monday, October 19, 2009 7:59:42 AM
loanranger,
here is a decent read on Informal verses Formal,
INFORMAL INVESTIGATIONS
The first phase of an SEC investigation is called the informal, or preliminary, investigation. During this phase, the commission's staff investigators look into the legitimacy of the alleged violations to determine whether there is sufficient evidence to launch a formal investigation. At this stage, both management and internal auditors can benefit by cooperating with investigators to resolve the dispute as quickly as possible. Accused companies are likely to incur greater damage to their reputation the longer an investigation takes to complete.
Well-documented internal audit workpapers may shorten an informal SEC investigation. While the Sarbanes-Oxley Act requires external auditors to maintain workpapers for seven years, IIA Performance Standard 2330. A2 states that the chief audit executive (CAE) should establish workpaper retention policies for the internal audit function that are consistent with the company's regulatory environment. Therefore, the company's legal counsel should recommend that workpapers be maintained for at least seven years. Under Sarbanes-Oxley, destroying documentation related to a federal investigation is a felony punishable by up to 20 years in prison as well as monetary penalties.
Because SEC investigators normally do not have subpoena power during an informal investigation, internal auditing should consult with senior management and legal counsel before handing over its workpapers to investigators or making any statements to them. Because a company's audit committee is composed solely of independent directors, and the committee's charter authorizes it to hire and compensate external investigators when necessary, the audit committee may be in the best position to convince the SEC that the company can effectively resolve any violation without a formal investigation.
If the SEC determines that its staff investigators have gathered sufficient evidence indicating that a violation has occurred, it will send the company a Wells notice, giving the accused firm one last chance to state reasons why a formal investigation is not necessary and why the commission should take no further action. A company can avoid a lengthy investigation by convincing the commission that it can effectively investigate the matter on its own. Internal auditors can offer an independent perspective regarding the alleged violation and possibly help identify the perpetrators before the commission decides to initiate a formal investigation.
After reporting their findings from an informal investigation to the commission, investigators may:
* Seek an order to begin a formal investigation.
* Recommend the commission file an action in a federal court seeking an injunction, civil penalties, disgorgement, and other remedies.
* Recommend the SEC file administrative proceedings.
* Refer the matter to state and local authorities, professional organizations, or federal agencies that can pursue criminal charges, such as the U.S. Department of Justice.
* Refer the matter to self-regulatory organizations, such as the exchange on which the company is listed. This may cause the exchange to suspend or delist the company.
In some cases, the SEC may decline to pursue any further action. This may occur if investigators conclude that a violation has not occurred, there is insufficient evidence to prosecute the alleged violators, or because they feel investor losses may outweigh the benefits of prosecuting the case.
FORMAL INVESTIGATIONS
The primary reason the SEC will pursue a formal investigation is to gather evidence it could not obtain during the informal investigation so that it can take necessary action against an alleged violator. Before initiating a formal investigation order, staff investigators must report their findings to the commission by filing an "action memorandum," which details evidence that supports the investigators' claim that a formal investigation is necessary.
Once the SEC begins a formal investigation, the target company is likely to face adverse publicity (see "Reporting Securities Investigations" on page 72). The commission publishes accounting and audit enforcement releases (AAERs) that disclose names of the alleged violators, the nature and extent of the accusations, whether the SEC will pursue administrative or civil action, and the civil penalties and disgorgement amounts it may seek. The SEC also discloses litigation releases that concern civil lawsuits it files in federal courts. The SEC discloses both AAERs and litigation releases on its Web site, www.sec.gov.
A formal SEC investigation may significantly change internal auditing's annual audit plans, depending on the nature and extent of the violation. Senior management and the audit committee should be alerted to material changes made to the audit plan as soon as possible. Before asking internal auditors for assistance, SEC investigators will assess the auditors' integrity, experience, and skills. CAEs should perform a cost-benefit analysis before committing internal audit resources to the investigation. This analysis should quantify the losses associated with a lengthy federal investigation, such as reputational damages, lost customers and suppliers, monetary penalties, and other remedies sought by the commission.
http://findarticles.com/p/articles/mi_m4153/is_1_64/ai_n27150059/pg_2/?tag=content;col1
here is a decent read on Informal verses Formal,
INFORMAL INVESTIGATIONS
The first phase of an SEC investigation is called the informal, or preliminary, investigation. During this phase, the commission's staff investigators look into the legitimacy of the alleged violations to determine whether there is sufficient evidence to launch a formal investigation. At this stage, both management and internal auditors can benefit by cooperating with investigators to resolve the dispute as quickly as possible. Accused companies are likely to incur greater damage to their reputation the longer an investigation takes to complete.
Well-documented internal audit workpapers may shorten an informal SEC investigation. While the Sarbanes-Oxley Act requires external auditors to maintain workpapers for seven years, IIA Performance Standard 2330. A2 states that the chief audit executive (CAE) should establish workpaper retention policies for the internal audit function that are consistent with the company's regulatory environment. Therefore, the company's legal counsel should recommend that workpapers be maintained for at least seven years. Under Sarbanes-Oxley, destroying documentation related to a federal investigation is a felony punishable by up to 20 years in prison as well as monetary penalties.
Because SEC investigators normally do not have subpoena power during an informal investigation, internal auditing should consult with senior management and legal counsel before handing over its workpapers to investigators or making any statements to them. Because a company's audit committee is composed solely of independent directors, and the committee's charter authorizes it to hire and compensate external investigators when necessary, the audit committee may be in the best position to convince the SEC that the company can effectively resolve any violation without a formal investigation.
If the SEC determines that its staff investigators have gathered sufficient evidence indicating that a violation has occurred, it will send the company a Wells notice, giving the accused firm one last chance to state reasons why a formal investigation is not necessary and why the commission should take no further action. A company can avoid a lengthy investigation by convincing the commission that it can effectively investigate the matter on its own. Internal auditors can offer an independent perspective regarding the alleged violation and possibly help identify the perpetrators before the commission decides to initiate a formal investigation.
After reporting their findings from an informal investigation to the commission, investigators may:
* Seek an order to begin a formal investigation.
* Recommend the commission file an action in a federal court seeking an injunction, civil penalties, disgorgement, and other remedies.
* Recommend the SEC file administrative proceedings.
* Refer the matter to state and local authorities, professional organizations, or federal agencies that can pursue criminal charges, such as the U.S. Department of Justice.
* Refer the matter to self-regulatory organizations, such as the exchange on which the company is listed. This may cause the exchange to suspend or delist the company.
In some cases, the SEC may decline to pursue any further action. This may occur if investigators conclude that a violation has not occurred, there is insufficient evidence to prosecute the alleged violators, or because they feel investor losses may outweigh the benefits of prosecuting the case.
FORMAL INVESTIGATIONS
The primary reason the SEC will pursue a formal investigation is to gather evidence it could not obtain during the informal investigation so that it can take necessary action against an alleged violator. Before initiating a formal investigation order, staff investigators must report their findings to the commission by filing an "action memorandum," which details evidence that supports the investigators' claim that a formal investigation is necessary.
Once the SEC begins a formal investigation, the target company is likely to face adverse publicity (see "Reporting Securities Investigations" on page 72). The commission publishes accounting and audit enforcement releases (AAERs) that disclose names of the alleged violators, the nature and extent of the accusations, whether the SEC will pursue administrative or civil action, and the civil penalties and disgorgement amounts it may seek. The SEC also discloses litigation releases that concern civil lawsuits it files in federal courts. The SEC discloses both AAERs and litigation releases on its Web site, www.sec.gov.
A formal SEC investigation may significantly change internal auditing's annual audit plans, depending on the nature and extent of the violation. Senior management and the audit committee should be alerted to material changes made to the audit plan as soon as possible. Before asking internal auditors for assistance, SEC investigators will assess the auditors' integrity, experience, and skills. CAEs should perform a cost-benefit analysis before committing internal audit resources to the investigation. This analysis should quantify the losses associated with a lengthy federal investigation, such as reputational damages, lost customers and suppliers, monetary penalties, and other remedies sought by the commission.
http://findarticles.com/p/articles/mi_m4153/is_1_64/ai_n27150059/pg_2/?tag=content;col1
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