The amount of accounting and auditing enforcement actions undertaken by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) decreased in 2021, resulting in a sharp decline in monetary settlements, according to a new report.
Cornerstone Research on Wednesday published its “Accounting and Auditing Enforcement Activity—2021 Review and Analysis,” in which it identified the SEC and PCAOB publicly disclosed 52 accounting and auditing enforcement actions in 2021. Monetary settlements totaled approximately $159 million, representing a nearly 90 percent decline from $1.4 billion in 2020.
The SEC has oversight authority over the PCAOB. Both agencies saw significant changes in leadership last year; Gary Gensler took over as chair of the SEC in April and two months later removed William Duhnke III as head of the PCAOB. The audit regulator now has four of its five board seats occupied by new members under the leadership of Erica Williams.
The SEC initiated 34 accounting and auditing enforcement actions in 2021 involving 26 individuals and 20 firms. The agency’s activity level declined for the third consecutive year, down from 50 initiated actions in 2020.
Of the agency’s 2021 total, 19 actions referred to announced restatements, including seven alleging improper revenue recognition. The figure was a “steep decline” from the prior year, when 15 actions that referred to a restatement also alleged improper revenue recognition, according to Cornerstone.
Five SEC actions alleged material weaknesses in internal control.
All accounting and auditing enforcement actions in 2021 were initiated as administrative proceedings, a first since 2016, according to Cornerstone’s analysis.
Common allegations: The two most common allegations in SEC actions in 2021 concerned revenue recognition and violations of internal control over financial reporting, though the latter’s total (32 percent of allegations) declined from recent years.
In 2021, 49 respondents settled charges brought by the SEC, with monetary settlements totaling approximately $158 million, according to Cornerstone. The largest settlement was for $62 million with Kraft Heinz in September for improper accounting that led to the restatement of several years of financial reporting.
PCAOB activity: In 2021, the PCAOB publicly disclosed 18 audit-related enforcement actions. The total is the second lowest in the last six years, ahead of only 13 in 2020.
Nearly 40 percent of 2021 PCAOB actions involved alleged violations of the organization’s engagement quality review standard, according to Cornerstone. Seven of the 11 actions that involved firm respondents in 2021 contained allegations regarding quality control, consistent with 2020 levels.
The proportion of PCAOB actions in 2021 referring to announced restatements and/or material weaknesses in internal control (22 percent) was greater than the 2016–20 average (19 percent).
Of the 26 individual and firm respondents that settled with the PCAOB in 2021, the organization imposed monetary settlements against 18 (69 percent). Settlements totaled $985,000, down 24 percent from 2020 and 45 percent from 2019, according to Cornerstone.