Accounting and Auditing Enforcement Activity—2019 Review and Analysis

Elaine M. Harwood is Vice President and Alison M. Forman is a Principal at Cornerstone Research. This post is based on their Cornerstone memorandum.

The SEC and PCAOB publicly disclosed 81 accounting and auditing enforcement actions during 2019. Monetary settlements totaled approximately $628 million, $626 million of which was imposed by the SEC.

Research Sample and Data Sources

This research examines trends in accounting and auditing enforcement actions that were publicly disclosed by the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) between 2014 and 2019. [1]

Accounting and auditing enforcement actions include (1) SEC Accounting and Auditing Enforcement Releases (AAERs) listed in the SEC Division of Enforcement Annual Reports and available on the SEC’s website at https://www.sec.gov (“SEC actions”), and (2) PCAOB settled and adjudicated disciplinary orders available on the PCAOB’s website at https://pcaobus.org (“PCAOB actions”). SEC actions exclude follow-on administrative proceedings. SEC and PCAOB auditing actions exclude actions unrelated to the performance of an audit (e.g., failure to register with the PCAOB or to timely disclose certain reportable events to the PCAOB).

Respondents include (1) SEC registrants and audit firms (“firms”), and (2) individuals employed by or associated with SEC registrants and audit firms (“individuals” or “related individuals”).

Actions that involve one firm respondent are considered “non-U.S.” if the firm is headquartered outside the U.S. Actions that involve multiple firm respondents are considered “non-U.S.” if (1) all of the firm respondents are headquartered outside the U.S., or (2) one or more of the firm respondents are headquartered outside the U.S. and the alleged violations occurred outside the U.S. Actions that only involve individual respondents are considered “non-U.S.” if (1) the individuals are licensed or reside outside the U.S., and (2) the alleged violations occurred outside the U.S.

Actions involving restatements are actions that refer to an announcement that the company will restate, may restate, or has unreliable financial statements. Actions involving material weaknesses in internal control are actions that refer to an announcement that the company has a material weakness in internal control.

Monetary settlements include penalties, disgorgement, and prejudgment interest. Settlements include all actions settled during the year, regardless of when the action was initiated.

Accounting and Auditing Enforcement Activity: 2014–2019

The U.S. Securities and Exchange Commission initiated 57 enforcement actions involving accounting and auditing allegations in 2019, an 11% decline from the 64 actions initiated in 2018. The SEC brought only 5% of accounting and auditing actions as civil actions, the lowest percentage since 2016. Of the 69 individual and firm respondents that settled with the SEC in 2019, monetary settlements were imposed on 55 (80%). Settlements totaled $626 million.

The Public Company Accounting Oversight Board publicly disclosed 24 enforcement actions involving auditing in 2019, a 26% increase compared to the 19 actions disclosed in 2018. [2] Of the 40 individual and firm respondents that settled with the PCAOB in 2019, monetary settlements were imposed on 24 (60%). Settlements totaled $2 million.

SEC Actions Involving Accounting and Auditing Declined in 2019

  • The total number of initiated SEC actions declined 11% in 2019, but remained near the 2014–2018 average.
  • During 2019, the SEC brought only 5% of accounting and auditing actions as civil actions, the lowest percentage since 2016.
  • All but three of the actions brought by the SEC in 2019 settled on the same day they were publicly disclosed

The Percentage of Non-U.S. Actions Brought by the SEC Declined in 2019

  • The percentage of non-U.S. actions brought by the SEC was lower in 2019 (18%) than 2018 (22%), but higher than the 2014–2018 average (12%).
  • The majority of non-U.S. actions (60%) involved internal control over financial reporting (e.g., alleged violations of the Foreign Corrupt Practices Act).

SEC Actions Involving Announced Restatements and/or Material Weaknesses in Internal Controls Increased

  • The percentage of 2019 SEC actions involving announced restatements and/or material weaknesses in internal controls (42%) was nearly double the 2018 percentage (23%) and was higher than the 2014–2018 average (33%).
  • The majority (74%) of the actions involving restatements in 2019 involved accounting, rather than auditing, allegations. There were no non-U.S. actions involving restatements.
  • Of the actions involving restatements in 2019, nearly half involved allegations related to revenue recognition.

The Most Common Allegations in 2019 SEC Actions Involved Financial Reporting Issues

  • Of the actions brought by the SEC that involved financial reporting, nearly half (47%) alleged revenue recognition violations.
  • Of the actions brought by the SEC that related to auditing, half involved allegations concerning engagement quality reviews, over 40% involved the auditor’s response to the risk of material misstatement, and one-third involved related party transactions.
  • Nearly 90% of actions with auditing allegations involved U.S. respondents.

The Majority of SEC Actions Involved SEC Registrants and Related Individuals

  • There were 75 respondents in the actions brought by the SEC in 2019, 25% below the average number of respondents during 2014–2018.
  • In 2019, 44% of respondents in SEC actions were auditors or audit firms.
  • Of the auditor respondents, 12% were auditors or audit firms of broker-dealers, equal to the 2014–2018 average.

The Total Number of Respondents in SEC Actions Declined in 2019

  • In 2019, just over half of the SEC actions involved only firms, up from the 2014–2018 average of 38%.
  • For the second year in a row, the majority of respondents in SEC actions were firms.

Total Monetary Settlements in 2019 SEC Actions Were Approximately $626 Million

  • In addition to bars, suspensions, and other nonmonetary sanctions, the SEC imposed monetary penalties against 80% of respondents.
  • Total monetary settlements against individuals were approximately $5 million, nearly $2 million higher than in 2018. The median settlement increased from $25,000 in 2018 to $38,795 in 2019.
  • Total monetary settlements against firms were approximately $621 million. Although the total settlements against firms declined in 2019, the median settlement increased from $1.5 million in 2018 to $4.1 million in 2019. Three firms each paid monetary penalties of at least $100 million in 2019.

PCAOB Actions Increased in 2019, but Remained Below the 2014–2018 Average

  • As required by the Sarbanes-Oxley Act, the PCAOB keeps its investigations and disciplinary proceedings confidential and nonpublic until the matter is settled or otherwise finalized. [3]
  • PCAOB enforcement actions increased 26% in 2019 compared to 2018, the year in which the PCAOB disclosed its lowest number of actions since 2014.
  • At 24, the number of PCAOB actions in 2019 was approximately 77% of the 2014–2018 average.
  • In 2019, the PCAOB did not disclose any actions pertaining to audits of broker-dealers. During 2014–2018, actions involving auditors and audit firms of broker-dealers comprised 30% of all actions.

The Number of Non-U.S. Actions Brought by the PCAOB Remained Low

  • The percentage of PCAOB actions involving non-U.S. respondents in 2019 (29%) decreased compared to 2018 (32%), but was higher than the 2014–2018 average (24%).
  • Deficiencies in the firm’s system of quality control and/or violations of audit documentation requirements were alleged in all of the 2019 PCAOB actions involving non-U.S. respondents.

Few PCAOB Actions Involve Announced Restatements and/or Material Weaknesses in Internal Controls

  • Only 16% of the actions from 2014 through 2019 involved announced restatements and/or material weaknesses in internal controls.
  • Three of the four PCAOB actions with an announced restatement and/or material weakness in internal controls in 2019 involved revenue recognition.

The Most Common Allegation in 2019 PCAOB Actions Involved Audit Firms’ System of Quality Control

  • The most common allegations in the 2019 PCAOB actions pertained to violations of the Audit Evidence standard and alleged ineffective systems of quality control, [4] each of which was alleged in over 40% of the 2019 actions.
  • Nearly 40% of the 2019 actions alleged violations of Evaluating Audit Results.
  • A third of the actions involved alleged violations of the Engagement Quality Review (EQR) standard.

The Number of Unique PCAOB Actions Increased in 2019

  • At times, PCAOB actions involve other relevant entities and/or individuals. The PCAOB identifies related actions that are settled or otherwise finalized as a separate action. In certain instances, related actions settled on different dates and/or included different allegations.
  • In 2019, there were 18 unique PCAOB actions, a 20% increase from the 15 unique actions in 2018.
  • One in four of the 2019 PCAOB actions was identified by the PCAOB as being related to other action(s).

The Number of Individual Respondents in PCAOB Actions Increased in 2019

  • In 2019, nearly half of the PCAOB actions involved only individual auditors, up from the 2014–2018 average of 29%.
  • The total number of respondents increased in 2019, but remained below the 2014–2018 average.

Total Monetary Settlements in 2019 PCAOB Actions Were Approximately $2 Million

  • In addition to bars, suspensions, and other nonmonetary sanctions, the PCAOB imposed monetary penalties against 60% of respondents in 2019.
  • The PCAOB assessed monetary penalties against 48% of individuals and 85% of firms in 2019.
  • Total monetary settlements against individuals were $165,000, which was $15,000 lower than in 2018. The median settlement declined from $25,000 in 2018 to $10,000 in 2019.
  • Total monetary settlements against firms were $1,780,000, which was $745,000 higher than in 2018. The median settlement increased from $15,000 in 2018 to $50,000 in 2019.

Endnotes

1The research was expanded this year to include all SEC and PCAOB enforcement actions that involve accounting and auditing. Prior research focused only on actions that involved (1) U.S.-licensed certified public accountants (CPAs) who were employed by SEC registrants, (2) U.S.-licensed auditors, and (3) audit firms in the U.S.(go back)

2As required by the Sarbanes-Oxley Act, the PCAOB keeps its investigations and disciplinary proceedings confidential and nonpublic until the matter is settled or otherwise finalized. See “Enforcement,” PCAOB website, https://pcaobus.org/Enforcement/Pages/default.aspx.(go back)

3See “Enforcement,” PCAOB website, https://pcaobus.org/Enforcement/Pages/default.aspx.(go back)

4See PCAOB 2019 Annual Report, p. 5, available at www.pcaobus.org (“For all of our higher priority areas, we focused on quality control deficiencies and getting to the root cause of identified violations.”).(go back)

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