The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Securities Laws

Abstract:     
Recent legislation - Section 10A of the Securities Exchange Act of 1934 for auditors and Section 307 of the Sarbanes-Oxley Act for lawyers - has imposed on corporate outsiders certain duties to monitor unlawful activity within a corporation, and to report that activity to designated corporate actors. It is generally understood that the monitoring obligations of lawyers and auditors extend to corporate activity which might constitute a violation of federal securities law and state fiduciary duty standards. But do the monitoring and reporting obligations extend to unlawful activities beyond the securities laws - for example to violations of the laws prohibiting racial, religious, ethnic, age and sex discrimination? This article suggests that a strong set of arguments exist to support the answer - yes. The article first demonstrates that the monitoring rules create a broad obligation to detect and report that extends to any violation of law that could have a direct or indirect material effect on the financial condition of the corporation. The article then suggests that the nature of the detection and reporting obligation is active - requiring auditors and lawyers to implement procedures for detecting violations. The failure to comply with the detect and report obligations can contribute, under certain circumstances, to auditor or lawyer liability as a principal under the securities laws, to liability as a principal under the discrimination laws, and to greater exposure to discovery from private plaintiffs. The article ends with an extended hypothetical, involving outside counsel, auditors and a client corporation engaging in potentially discriminatory conduct, in which the insights developed in the article are applied.

Keywords: Sarbanes-Oxley, Securities Exchange Act, section 10A, corporate securities, securities fraud, auditing, professional responsibility, discrimination

JEL Classifications: J71, K10, K22, K42, K49, M42

Accepted Paper Series