SEC, PCAOB actions against accountants declined steeply in 2018

The U.S. Securities and Exchange Commission and Public Company Accounting Oversight Board finalized 45 enforcement actions involving accountants in 2018, marking a significant decline from the 75 finalized actions involving accountants in 2017, according to a new Cornerstone Research report released Wednesday.

According to the report, “Regulatory Actions Involving Accountants-2018,” the decrease in SEC actions involving accountants continues a three-year downward trend, and represents a 20 percent decline in 2018 over the previous year. PCAOB enforcement actions involving auditors and audit firms declined 63 percent in the same time frame, and 2018’s 13 total actions represents the lowest since 2013. Last year was also the PCAOB’s most active enforcement year, according to the report.

The majority of SEC and PCAOB actions in 2018 resulted in a follow-on enforcement action by a state board of accountancy. In addition to bars, suspensions, and other non-monetary sanctions, monetary settlements were imposed on 32 of the 67 individual and audit firm respondents (48 percent), and totaled less than $3.3 million.

The report focused on enforcement actions finalized between 2013 and 2018 involving U.S.-licensed accountants, including CPAs employed by SEC registrants, auditors and audit firms, with research based on the SEC’s published Accounting and Auditing Enforcement Releases and the PCAOB’s Board Enforcement Orders.

The decline in SEC actions involving accountants in 2018 was due to a significant decrease in final actions involving CPAs employed by SEC registrants, at 16, the lowest level in the past six years. The majority of overall SEC actions involved individuals, aligning with the average since 2013, with three out of four final actions involving only individuals.

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The most common SEC enforcement actions involving accountants were insider trading and engagement quality reviews, with nearly one in three actions concerning a financial statement restatement in 2018. Nearly half of the actions involving auditors or audit firms in 2018 were related to Engagement Quality Reviews, and more than one in three alleged violations related to auditing of Related Party Transactions.

Total monetary settlements in final SEC actions against individual accountants were less than $600,000, and total monetary settlements against audit firms were approximately $2 million.

In terms of PCAOB actions, audits of brokers and dealers composed the largest percentage, at 46 percent in 2018. The majority of final PCAOB actions, 70 percent, involved both an audit firm and one or more auditors, which is up from the 54 percent average from 2013 to 2017. In 2018, more than two in three final actions involved Engagement Quality Reviews and nearly one in three final actions involved auditing of Related Party Transactions.

Total monetary settlements against individual accountants were $25,000 and total monetary settlements against audit firms were $660,000.

“Enforcement actions that involved financial-statement restatements accounted for $2.3 million of the $3.3 million in total monetary settlements in 2018,” stated Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice. “This suggests that restatements are associated with higher monetary settlements in enforcement actions involving accountants.”

The report also found a significant increase in the number of SEC actions finalized in the second half of 2018, with nearly two out of three of the year’s actions finalized in that period.

“The dramatic decline in the number of final enforcement actions corresponds with significant changes in PCAOB leadership,” stated Harwood. “At the same time, a marked increase in the number of actions finalized by the SEC in the second half of the year may suggest increased enforcement activity involving accountants in the future.”

The PCAOB announced shifts in leadership and extensive changes in how it inspects and interacts with financial statement preparers last year, when chairman William Duhnke an all-new slate of four board members were installed. The changes came after a series of high-level resignations last May. The PCAOB has subsequently named a new chief auditor and director of professional standards and added two brand-new board positions.

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