Question

A CPA firm is preparing the audited financial statements for a required SEC filing. In the course of this work, the firm determines that an illegal act is likely to have occurred. Under the 34 Act, Section 10A, the first step the firm should take is to report this act to:

A) The SEC and the company's audit committee.
B) The company's management.
C) The company's shareholders.
D) The company's legal department.

Answer 1

When a CPA firm discovers a likely illegal act while preparing audited financial statements for an SEC filing, they must first report it to the company's management. If management does not respond appropriately, the issue should then be raised with the audit committee. This procedure aligns with corporate governance measures designed to protect investors from accounting fraud.

Step-by-step explanation:

Under Section 10A of the Securities Exchange Act of 1934, when a CPA firm preparing audited financial statements for an SEC filing discovers an illegal act, the initial step they should take is to inform the company's management about their findings. The intention here is to give the company's management the opportunity to investigate the matter and take appropriate action. If the management does not adequately address the CPA firm's concerns, they would then be required to escalate the issue to the company's audit committee. There is a clear sequence of reporting that must be followed, starting with management and potentially moving up to higher levels of governance, to ensure that the company has the opportunity to correct the issue internally before it becomes a matter for external oversight by the SEC or shareholders. This process is in line with the principles of corporate governance established to protect investors from accounting fraud and to ensure that they have accurate financial information about a company's operations.

Answer 2

Under the 34 Act, Section 10A, the first step a CPA firm should take when an illegal act is likely to have occurred in preparing audited financial statements for an SEC filing is to report the act to the SEC and the company's audit committee.

Step-by-step explanation:

Under the 34 Act, Section 10A, if a CPA firm preparing audited financial statements for an SEC filing determines that an illegal act is likely to have occurred, the first step the firm should take is to report this act to the SEC and the company's audit committee. This is because both the SEC and the audit committee have the authority and responsibility to investigate and take appropriate actions in cases of illegal acts.