Enforcement actions against accountants on the decline

A report from Cornerstone Research says settled enforcement actions by the Securities and Exchange Commission and the Public Company Accounting Oversight Board against accountants “fell sharply” — from 75 actions in 2017 to 45 in 2018. The SEC resolved 32 cases in 2018, down 20 percent from 40 the year before. The PCAOB settled 13 enforcement actions in 2018, 63 percent less than the 35 actions finalized in 2017.

The report also notes the SEC settled more of its cases in 2018 in the latter part of the year than in the early months. “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,” said Elaine Harwood, vice president at Cornerstone Research and head of the firms’ accounting practice.

The report focuses on actions brought against certified public accountants who work for SEC registrants as well as auditors and audit firms. The SEC brought 16 actions against CPAs at public companies in 2018, down from 27 the year before. Actions against auditors and audit firms rose from 12 in 2017 to 14 in 2018. When further including actions against auditors and audit firms for brokers and dealers, the total number of actions fell from 40 in 2017 to 32 in 2018. And those totals are down from 51 in 2016 and 55 in 2015.

The report says the SEC continued in its trend of the past five years in pursuing actions more against individuals than against firms. In 2018, 75 percent of actions targeted individuals and 19 percent named both individuals and firms. Only two cases pursued charges against firms rather than individuals.

Nearly one in three actions pursued by the SEC in 2018 was tied to a restatement of financial statements while one in 10 related to allegations of insider trading. Nearly half of the actions against auditors and audit firms related to engagement quality reviews, and more than one-third involved auditing of related party transactions.

At the PCAOB, enforcement settled only 7 cases against auditors and audit firms involved in public company engagements in 2017 compared with 21 in 2017, 19 in 2016, and 22 in 2015. When including broker/dealer audits, the PCAOB settled 13 actions in 2018, 35 in 2017, 28 in 2016 and 33 in 2015. Before those high water mark years of 2015 to 2017, actions totaled 14 in 2014 and 11 in 2013.

The significant drop off at the PCAOB corresponds with when the PCAOB experienced a significant change in leadership, Harwood notes. The SEC appointed five new board members to the five-member board at the beginning of 2018, replacing board members whose terms had ended or who had served past their terms, along with one vacant seat.

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