Commissioner Uyeda Discusses the SEC’s Focus on Accounting
In a recent speech, SEC Commissioner Mark T. Uyeda discussed the SEC’s focus on accounting violations. See Remarks at ICAEW Event – World-Class Regulation: Building Trust and Transparency in International Markets (May 12, 2023). His remarks underscore that the Commission is ramping up enforcement activity involving accounting and auditing -- the same point illustrated in Cornerstone’s report on 2022 SEC accounting and auditing enforcement. See Accounting Class Actions are Increasing Slowly While SEC Accounting Cases are Skyrocketing in this Update. Commissioner Uyeda also emphasized the importance of a strong audit committee as a means of lowering the likelihood that a company will become the target of SEC financial reporting enforcement.
From an audit committee perspective, three points in this speech are of interest:
Actions Against Individuals. Based on the Cornerstone report, Commissioner Uyeda points out that accounting cases against individuals increased significantly over prior years and explains why the trend of naming more individuals in SEC accounting enforcement cases is likely to continue:
“When this [a reporting company accounting violation] happens, a potential cause is the activities of one or more bad actors within the company’s management. When bringing enforcement actions in these instances, the SEC should continue to focus on pursuing those individual bad actors and levying appropriate remedies against them. An enforcement program focused solely on charging and imposing monetary penalties on firms, without parallel actions to hold individuals accountable, will mostly harm the firms’ current shareholders and will not discourage individuals from becoming bad actors in the future. Accordingly, charges and penalties against individuals serve as the strongest disincentive against people becoming bad actors and engaging in the same activities in the future.”
Compensation Claw Backs Following Restatements. Like Cornerstone, Commissioner Uyeda notes that in several 2022 actions the Commission sought to recover bonuses and profits from executives following a restatement of financial statements under Section 304 of the Sarbanes-Oxley Act. He also notes that in 2022 the Commission adopted a broader claw back rule, based on authority granted in the Dodd-Frank Act. See Restatements Will Trigger Compensation Claw Backs Under New SEC Rule, November-December 2022 Update. Commissioner Uyeda predicted, “Going forward, clawbacks pursuant to this rule may become a significant process that companies will need to go through whenever [they engage] in a restatement.”
Role of the Audit Committee. In Commissioner Uyeda’s view, a strong audit committee can lower the likelihood of accounting violations by actively overseeing and understanding the accounting policies, estimates, and judgments made by management. “Carrying out this duty requires insight into whether the controls and procedures related to financial reporting are effective.” With respect to the audit committee’s oversight of the company’s auditor, he emphasized the importance of “determining that the auditor is independent under the myriad of rules that govern independence” of contributing “to a culture of cooperation between management and the auditor, while still ensuring that differing views on important issues are raised to the committee.”