Accounting and Auditing Enforcement was Down in 2021, But May Now be on the Upswing
A Cornerstone Research report, Accounting and Auditing Enforcement Activity—2021 Review and Analysis, finds that Securities and Exchange Commission enforcement cases involving accounting and auditing decreased in 2021 and that monetary settlements fell sharply. At the Public Company Accounting Oversight Board, enforcement activity increased in 2021, but remained below pre-pandemic levels. (For a comparison to 2018 enforcement activity, see SEC and PCAOB Cases Against Accountants Decline, While Accounting Class Actions Near Record Highs, May-June 2019 Update.) Both the SEC and the PCAOB experienced leadership changes in 2021, and, based on the rhetoric coming out of these agencies, Cornerstone suggests that accounting and auditing enforcement may be more active in 2022.
The SEC. In 2021, the SEC brought 34 accounting and auditing actions against 26 individuals and 20 firms, a decline of 32 percent from the 50 actions in 2020. The 34 cases filed in 2021 were a 41 percent decrease from the average of 58 actions initiated in the years 2016–2020 and the lowest number of new cases in the prior five years. While the overall number of cases fell, the number of actions involving auditors and audit firms increased by 33 percent, from 12 actions in 2020 to 16 in 2021.
Monetary settlements in SEC accounting and auditing cases totaled approximately $158 million, a decline of 90 percent from $1.4 billion in 2020. In eleven of the 49 settlements, the SEC reported that it considered the respondent’s self-reporting, cooperation, and/or remedial efforts in determining the terms of the settlement.
As to what attracts SEC enforcement attention, 19 of the 34 SEC actions referred to a restatement announcement and five referred to disclosure of material weaknesses in internal control over financial reporting. The most common allegations related to revenue recognition and to violations of internal control requirements, each of which appeared in about one-third of the cases.
The PCAOB. In 2021, the PCAOB publicly disclosed 18 enforcement actions, a 38 percent increase from the 13 actions disclosed in 2020. The 18 actions involved 26 respondents, a four percent decrease from 2020. (The Sarbanes-Oxley Act prohibits the PCAOB from disclosing cases until they are settled or result in a decision against the respondent, so it is possible that the Board commenced additional actions in 2021 but that those actions are still pending.)
Twenty-six individuals or accounting firms settled with the PCAOB in 2021. Eighteen of these respondents entered into monetary settlements totaling approximately $1.1 million. The median settlement against both firms and individuals decreased in 2021; in the firm settlements, the median settlement and average settlement were less than half the comparable 2020 amounts. The PCAOB mentioned the respondent’s cooperation in three of its 2021 settlements.
Forty percent of 2021 PCAOB actions alleged violations of the Engagement Quality Review standard (i.e., the requirement that a second partner review the audit before the opinion is issued), down from 70 percent in 2020. Seven of the eleven actions against accounting firms contained allegations related to the firm’s system of quality control. Twenty-two percent of PCAOB actions in 2021 referred to restatements and/or to material weaknesses in internal control.
Cornerstone quotes statements from the SEC and PCAOB suggesting that accounting and auditing enforcement may pick up in 2022. For example, SEC Division of Enforcement Director Gurbir Grewal reportedly said at a conference in December 2021 that the Division would “target deficient auditing by auditors, auditor independence cases, cases around earnings management, rev rec cases” and that there is “a robust pipeline, unfortunately, of these cases, and you will see some of these in the very near future.”