The number of SEC and PCAOB accounting and auditing enforcement actions decreased in 2020 relative to 2019, but monetary settlements increased year-over year, according to a recent report from Cornerstone Research. The report, entitled “Accounting and Auditing Enforcement Activity – 2020 Review and Analysis” (here), analyzes the agencies’ publicly disclosed accounting and auditing enforcement actions between 2015 and 2020. Cornerstone Research’s April 27, 2021 press release about the report can be found here.
The two agencies brought a total of 63 disclosed accounting and auditing enforcement actions in 2020, with 50 of those brought by the SEC and 13 brought by the PCAOB. Monetary settlements in accounting and auditing enforcement actions during 2020 totaled over $1.4 billion, with most of the total amount attributable to SEC settlements.
The 50 SEC accounting and auditing enforcement actions in 2020 represented a decline in the number of SEC enforcement actions of that type from 58 in 2019 (representing a decline of 14%). The 50 enforcement actions during 2020 is also below the annual average of 60 enforcement actions during the period 2015-2016 (representing a decline of 17%).
The decline in the number of accounting and enforcement actions in 2020 seems due in part to the low number of actions initiated in the first quarter of 2020, which saw the lowest level of activity for any quarter during the period 2015 to 2020. This first quarter decline may be attributable to the pandemic; for example, the SEC did not initiate any actions in March 2020, while the number of actions initiated during the final three quarters of the year returned to 2019 levels.
Of the 50 SEC accounting and auditing enforcement actions brought during 2020, 46 (92%) were brought as administrative proceedings, and four (8%) were brought as civil actions. All but one of the administrative proceeds involved a concurrent announcement of a settlement the same day as the proceedings were brought. All four of the civil actions were resolved by the end of 2020.
A number of the 2020 accounting and auditing enforcement actions were brought against non-U.S. firms and individuals. Of the 50 SEC enforcement actions, 7 (14%) involved non-U.S. respondents, compared to 10 out of 58 (17%) in 2020. The 2020 percentage of non-U.S. respondents is in line with the 2015-2019 percentage involvement of non-U.S. respondents (14%).
The most common allegations in the 50 SEC accounting and auditing enforcement actions in 2020 related to internal control over financial reporting (involved in more than half of enforcement actions) and revenue recognition (involved in about one-third of enforcement actions).
The report divides the respondents to SEC enforcement action into three groups: SEC registrants and related individuals; auditors and audit firms; and auditors or audit firms of broker-dealers. The number of SEC accounting and auditing enforcement actions against SEC registrants and related individuals increased by 35% in 2020 to 58 from 43 in 2019. The number of enforcement actions against auditors and audit firms decline from 33 enforcement actions in 2019 to 12 in 2020, a decrease of 64%. There were no actions involving auditors or audit firms of broker-dealers in 2020 (compared to 4 in 2019).
The penalties awarded in SEC accounting and auditing enforcement actions include bars, suspensions and other nonmonetary sanctions, as well as monetary sanctions. The SEC imposed monetary sanctions against 75% of the respondents in the 2020 SEC accounting and auditing enforcement actions for total sanctions of approximately $1.4 billion, which is more than double the 2019 total against firms of $621 million (but well below the 2018 total against firms of $2.1 billion). Much of the 2020 total is attributable to a few larger sanctions award, including two firms that paid monetary settlements of over $100 million. The median settlement decreased from $4.1 million in 2019 to $3.4 million in 2020.
Of the specific amounts involved in the 2020 accounting and auditing enforcement action monetary settlements, 60% represented disgorgement, 37% represented civil penalties, and 3% represented pre-judgment interest. Some of the largest disgorgement amounts were imposed after the U.S. Supreme Courts June 2020 decision in Liu v. SEC (about which refer here). 97% of the total amount of disgorgement awarded in 2020 were imposed after the Liu decision. For individual respondents, disgorgement represented13% of all 2020 monetary settlements, while civil penalties represented 86%. Prejudgment interest accounted for the remaining 1%. In 23 out of 71 settlements, the SEC reported that it took into account the respondent’s self-reporting, cooperation, and/or remedial efforts as it set penalties or other remedies.
As far as PCAOB accounting and auditing enforcement actions, the number actions decreased to 13 from 24 in 2019, representing a 46% decrease. The 13 PCAOB enforcement actions in 2020 is the lowest number of disclosed actions in the last six years and just 39% of the 2015-2019 average number of PCAOB enforcement actions. Total monetary settlements against firms in PCAOB enforcement actions also decreased, from $1.78 million to $1.28 million.