Enforcement actions against accountants declined last year
The Securities and Exchange Commission and the Public Company Accounting Oversight Board finalized slightly fewer enforcement actions against accountants in 2017, slipping from 79 in 2016 to 75 last year, according to a new report.
The report, from Cornerstone Research, found that while the number of finalized SEC actions declined, they actually increased from the PCAOB. The number of finalized SEC actions against auditors and audit firms in 2017 was only half the total in 2016, but PCAOB enforcement rose to its highest level with more actions taken against auditors and audit firms of brokers and dealers.
After a lull following the financial crisis in 2008, when the SEC focused its attention on Ponzi schemes and other investment frauds, the commission’s enforcement division once again turned its attention to accounting fraud and misstatements using technology tools such as a risk-based Accounting Quality Model. However, those stepped up enforcement efforts seem to have relaxed somewhat last year. The trend in the past two years suggests that SEC enforcement involving accountants is again returning to pre-2015 levels.
In total, the SEC finalized 40 enforcement actions involving accountants (CPAs employed by SEC registrants, auditors, and audit firms) last year, a more than 20 percent decline from the 51 actions it finalized in 2016. The SEC finalized only 13 actions related to audits of issuers and brokers and dealers, compared to 26 in each of the prior two years, which was the main reason for the overall decline in 2017.
In contrast, the PCAOB finalized 35 actions in 2017, an increase from the 28 finalized in 2016 and the highest level in PCAOB history. The uptick in PCAOB enforcement was mainly due to increased actions against auditors and audit firms of brokers and dealers. Increased actions against auditors and audit firms of brokers and dealers drove PCAOB enforcement to the highest level in its history. Between 2015 and 2017, the PCAOB finalized an average of 32 actions, nearly three times the 2012–2014 average.
“For accountants, resolving an SEC or PCAOB action is typically not the end of the story,” said Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice, in a statement. “In the states we studied, the majority of SEC and PCAOB actions led to a state follow-on action, despite the fact that an accountant did not admit to the charges and even when the accountant’s license was inactive.”
The majority of SEC and PCAOB actions finalized between 2012 and 2016 led to an enforcement action by a state board of accountancy in the top six states. Of the 174 SEC and PCAOB enforcement actions finalized over that fire-year period, 93 led to state follow-on actions. Enforcement actions against accountants can sometimes take up to six years when there is a state follow-on action. Auditors and audit firms appear to be more likely to be subject to a state follow-on action than non-auditor CPAs.