PCAOB and SEC crackdown on auditors appears to be ending

The Public Company Accounting Oversight Board and the Securities and Exchange Commission ramped up enforcement against auditors in the first half of 2024, but activity was more muted in the second half of the year, due to a key Supreme Court decision and multiple lawsuits against the PCAOB.

A new report from the Brattle Group found that the PCAOB and SEC together brought 58 enforcement actions against auditors in 2024, in line with 2023 (60 actions) and 2022 (59 actions) levels, but more than 50% higher than the average number of initiated actions during the regulators' prior administrations (2018–2021) until Erica Williams took over as chair of the PCAOB and Gary Gensler became chair of the SEC. However, Gensler stepped down on Inauguration Day after Donald Trump announced he would be naming former SEC commissioner Paul Atkins as the next SEC chair.

Last June, after the Supreme Court issued its ruling in the case of SEC v. Jarkesy restricting the use of administrative law judges, the SEC dropped most of its pending cases against auditors. While aggregate enforcement activity remained elevated in 2024, the SEC only initiated seven actions against auditors in 2024, down 50% from 2023. In the Jarkesy case, the Supreme Court ruled that the SEC's use of administrative proceedings to seek financial civil penalties in a securities fraud suit was unconstitutional.

Together, the PCAOB and SEC imposed $52.2 million in monetary sanctions against auditors in 2024, an increase of 66% from 2023 and 2.5 times higher than the 2018–2021 average, when Jay Clayton was leading the SEC and William Duhnke was chairing the PCAOB.

2024 enforcement was driven mainly by the PCAOB, which brought 88% of total actions and imposed 68% of total penalties.

The Supreme Court ruling appears to have affected the PCAOB, as well as three similar but anonymous lawsuits filed under the pseudonym John Doe from two individual auditors facing disciplinary action from the PCAOB and one auditing firm under investigation. While the PCAOB imposed record-breaking penalties for the third year in a row, enforcement statistics saw an unprecedented decline in the second half of the year. An uncharacteristically low 33% of the 51 actions initiated by the PCAOB in 2024 were brought in the second half of 2024, a departure from the 76–86% in the second half of each of the previous four years. Only 2% of the penalties imposed by the PCAOB in 2024 were imposed in the second half of the year, in stark contrast with 2023, when 83% of total penalties were imposed in the second half of the year. PCAOB activity in the second half of the year was at its lowest levels of any point in recent years.

"Though PCAOB and SEC enforcement against auditors remained high in 2024, aggregate statistics don't tell the full story," said Alison Forman, co-leader of Brattle's Accounting Practice, in a statement Thursday. "In fact, activity appears to have been substantially impacted by the Supreme Court's SEC vs. Jarkesy ruling, which found that the regulator's use of administrative proceedings to seek financial civil penalties for securities fraud was unconstitutional. We expect fallout from Jarkesy and similar constitutional challenges facing the PCAOB — as well as the new presidential administration — to dramatically shift the enforcement landscape moving forward."

The findings on the PCAOB mostly align with a report released last week by Cornerstone Research, which found the PCAOB increased its enforcement activity in 2024 to its highest level since 2017, and monetary penalties levied by the PCAOB reached their highest for the third consecutive year. The Cornerstone report found the PCAOB publicly disclosed 51 total enforcement actions, including 40 actions involving the performance of an audit. Most of these actions came in the first half of the year, with only 10 auditing actions finalized after the Supreme Court ruled against the use of administrative law judges in SEC v. Jarkesy. At $35.7 million, the number of total monetary penalties in 2024 marked a 78% increase over 2023 and represented nearly 40% of all monetary penalties imposed since the PCAOB's inception.

The release of the two reports come amid speculation that under the Trump administration, enforcement and penalties at both the PCAOB and the SEC may decline further, and the PCAOB may even be absorbed into the SEC, despite the Sarbanes-Oxley Act of 2002 that created the PCAOB. A change in the composition of the board members is also likely, as the PCAOB underwent sharp changes in both the first Trump administration and the Biden administration.