The Securities and Exchange Commission maintained a high level of enforcement actions last year despite the pandemic, but activity fell to record lows at the Public Company Accounting Oversight Board.
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The PCAOB had been going through a tumultuous period even before the pandemic broke out, with a changing set of board members and top officials replacing many of the longtime employees after Chairman William Duhnke took the helm in 2018. Under his leadership, the PCAOB has also been overhauling its inspection process and agenda.
The SEC has also gone through changes, especially this year with the new Biden administration. Chairman Jay Clayton departed at the end of 2020 and was succeeded initially by SEC commissioner Allison Herren Lee as acting chair, and more recently by Gary Gensler, who was confirmed by the Senate this month.
There was a slight decline in enforcement actions last year at the SEC. The commission initiated 50 enforcement actions involving accounting or auditing allegations in 2020, compared to 58 in 2019. The total number of respondents declined from 76 to 70. Most of the SEC actions last year involved SEC registrants and related individuals.
“After a steep decline in SEC accounting and enforcement activity in the first quarter of 2020, activity ramped up for the remainder of the year,” said report co-author Elaine Harwood, who is a senior vice president and head of the accounting practice at Cornerstone, in a statement. “Accounting issues remained at the forefront of SEC enforcement, increasing by 10 percent compared to 2019.”
Nearly all the SEC settlements came after a Supreme Court ruling last year in the case of Liu v. SEC, which authorized the commission to seek disgorgement as an equitable remedy. “After that ruling, the average disgorgement was nine times larger than the average disgorgement imposed against firms earlier in the year,” said Simona Mola, a senior manager at Cornerstone Research who co-authored the report, in a statement.
Of the 50 actions brought by the SEC in 2020, approximately one-third alleged revenue recognition violations, while more than half of them alleged violations related to a company’s internal control over financial reporting. The SEC initiated 46 accounting and auditing actions last year as administrative proceedings, accounting for 92 percent of its actions. Only four were civil actions, and all but one of them were resolved by the end of the year. The percentage of non-U.S. actions brought by the SEC was lower in 2020 at 14 percent, compared to 17 percent in 2019, but that was basically in line with the 2015–2019 average.
Slowdown at the PCAOB
As for the PCAOB, the board disclosed 13 audit-related actions in 2020, but that was just over half the number initiated in 2019. Similar declines were seen in the number of respondents, which fell from 40 to 27. Nearly two-thirds of the PCAOB actions last year involved a firm and at least one individual auditor.
“The PCAOB also saw a steep decline in auditing enforcement during the first quarter of 2020, remaining below pre-pandemic levels throughout the year,” said Alison Forman, a principal at Cornerstone Research who also co-authored the report, in a statement. “The PCAOB finalized fewer actions in each quarter of 2020 than the corresponding quarter in each of the last three years, and PCAOB enforcement activity for 2020 as a whole was the lowest of any year since we have been reporting on the data.”
The PCAOB defended its approach. “The board’s strategic approach is to prevent audit violations from occurring in the first place, which if we do effectively, will naturally lead to fewer enforcement cases," said PCAOB spokesperson Jackie Cottrell. "That’s a good thing for audit quality and investors. We continue, of course, to prioritize and pursue vigorously cases involving violations of PCAOB standards, PCAOB rules, and related securities laws. Our investigative pipeline remains consistent with prior years.”
The percentage of board actions in 2020 involving restatements and/or material weaknesses in internal control was 38 percent, which was more than double the 2015–2019 average. Only one PCAOB action involved revenue recognition.
The proportion of PCAOB actions involving non-U.S. respondents in 2020 was only 8 percent, a significant decrease from 29 percent in 2019. In 2020, for the second year in a row, the board didn’t disclose any actions pertaining to audits of broker-dealers. In the previous four years, actions involving auditors and audit firms of broker-dealers made up close to 30 percent of all actions on average.
There were some similarities with both the SEC and PCAOB last year in terms of penalties and settlements, as both of them imposed monetary penalties against around three-fourths of respondents. The settlements totaled more than $1.4 billion in 2020. Total monetary settlements in SEC actions increased in 2020, but the median settlement fell from $4.1 million in 2019 to $3.4 million in 2020.
