The Securities and Exchange Commission increased its accounting and auditing enforcement activity in fiscal year 2023, according to a report released Wednesday, although the total amount of the monetary settlements declined.
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However, even though the SEC reported $4.9 billion in total monetary settlements last fiscal year, the second highest on record, monetary settlements in accounting and auditing enforcement actions totaled $583 million, which was a 7% decline from the previous fiscal year and 47% lower than the average of total monetary settlements in the prior five fiscal years, according to the report.
Disgorgement and prejudgment interest comprised 67% of total monetary settlements imposed in FY 2023, while civil penalties made up 33% of the total monetary settlements. It was the first fiscal year that civil penalties amounted to less than half of total monetary settlements since FY 2020.
"The decline in monetary settlements during fiscal year 2023 may be due, in part, to a continued increase in the SEC's consideration given to cooperation and remedial efforts when imposing monetary settlements," said Simona Mola, a report coauthor and principal at Cornerstone Research, in a statement Wednesday. "Such consideration may translate in lower monetary settlements but not necessarily in no penalties at all. In fact, the proportion of respondents who received no monetary settlement decreased from last fiscal year."
Along with monetary settlements, the SEC levied nonmonetary sanctions on individual and firm respondents (such as officer and director bars and requirements to retain an independent consultant). Officer and director bars imposed on individual respondents who settled last fiscal year grew to 31% from 18% in FY 2022.
The SEC imposed nonmonetary sanctions against 50% of individual respondents who settled in FY 2023, a decline from 62% of individual respondents who settled in FY 2022.
Approximately one-fourth (26%) of the respondents who settled in FY 2023 offered cooperation, undertook remedial efforts, and/or self-reported to the SEC, up from 24% in FY 2022.
There were a total of 111 total respondents in accounting and auditing enforcement actions initiated in FY 2023, a slight increase from the 103 respondents in the previous fiscal year. In FY 2023, the SEC initiated 11 actions against non-U.S. respondents, higher than the average of nine actions per year from FY 2018 to FY 2022.
Of the 83 enforcement actions, 35 referred to announced restatements of financial statements, while 32 involved announcements of material weaknesses in internal control. Actions referring to announced restatements and/or material weaknesses in internal control stayed at 41, the highest number since FY 2021. Of the 83 actions initiated in FY 2023, 71 were administrative proceedings while 12 were civil actions.
The percentage of initiated actions referring to an announced restatement and material weakness in internal control (31%) grew to its highest level in recent years. As in FY 2022, the SEC's most common allegations regarded a company's revenue recognition and internal accounting controls. One or both violations were alleged in nearly two-thirds (63%) of enforcement actions in FY 2023.
The SEC initiated one action in FY 2023 as part of its ongoing Earnings Per Share Initiative, its fifth action in connection with the EPS Initiative since the effort started in 2020. The SEC also initiated three actions involving alleged violations of Section 304 of Sarbanes-Oxley (also known as the "clawback" provision) in FY 2023, a significant decrease from the nine actions initiated in the previous fiscal year and below the yearly average of five actions begun in FY 2018 to FY 2022.
