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SEC and PCAOB Enforcers Took An Extended Smoke Break In 2021

People who work in the enforcement divisions at the SEC and the PCAOB must have been busy doing other things than monitoring the gatekeepers of the capital markets last year, as accounting and auditing enforcement activity decreased and monetary settlements fell sharply, according to a recently released report from Cornerstone Research.

The two regulators made public a combined total of 52 (34 from the SEC and 18 from the PCAOB) accounting and auditing enforcement actions in 2021, down from 63 in 2020 and WAY lower than the 117 disclosed in 2016. In fact, total accounting and auditing enforcement has been in a downward spiral since 2016:

  • 2016: 117
  • 2017: 88
  • 2018: 83
  • 2019: 82
  • 2020: 63
  • 2021: 52

OK we should cut the enforcement staff some slack because of the pandemic, which has been to blame for the lack of enforcement actions against audit firms and individuals the last two years, Cornerstone Research believes, as well as the recent changes in leadership at both the SEC and the PCAOB. Gary Gensler was sworn in as SEC chairman last April, and the PCAOB was an absolute mess during William Duhnke’s reign of terror as PCAOB chairman, which lasted from January 2018 until Gensler fired his ass last June. Hopefully the new chair, Erica Williams, will get things straightened out over there.

And since 2016, in both years when a new SEC chairman has been sworn in (2017, Jay Clayton and 2021, Gensler), SEC enforcers weren’t as busy as in other years:

It’s not as cut and dry for the PCAOB, but the year Duhnke was sworn in (2018) had the third lowest amount of enforcement actions in the last six years. Actually, as I look at the bar graph from Cornerstone Research, PCAOB accounting and auditing enforcement actions were lower in the four years under Duhnke than in 2016 and 2017 when James Doty was at the helm of the PCAOB:

In a speech last December at the AICPA & CIMA Conference on Current SEC and PCAOB Developments, PCAOB enforcement director Patrick Bryan admitted that 2021 was “a challenging year in terms of enforcement, with the continued work from home environment” and that “the ongoing effects of the pandemic, the inability to travel, certainly had an impact on some of our investigations, particularly oversees investigations where travel was really necessary for us to advance those cases meaningfully.” But he also expects enforcement activity at the PCAOB to rebound in 2022, as enforcement staff “has worked very hard to develop a strong pipeline,” and he added, “Our teams have done a terrific job advancing cases in this environment. We anticipate making a number of recommendations early in the year. So I think 2022 will hit the ground running and certainly not have the slow start that we experienced this past year.”

The folks at Cornerstone Research weren’t really surprised by the overall decline in the level of enforcement activity in 2021, but they were surprised by the sharp drop in settlements. “The median settlement by firms in SEC enforcement matters was only $200,000, which means that half of the accounting and auditing cases that settled last year were for that amount or less,” said Elaine Harwood, report co-author, senior vice president, and head of Cornerstone Research’s accounting practice.

In 2021 SEC settlements totaled $158 million, of which $151 million were against companies. The total monetary settlements against individuals nearly doubled since 2020 to $7 million. The highest settlement was $62 million (Kraft Heinz in September), well below the maximum settlement in either 2019 or 2020. In 11 of the 49 settlements, the SEC reported that it considered the respondent’s self-reporting, cooperation, and/or remedial efforts as it set penalties and other sanctions.

Of the 34 SEC enforcement actions in 2021, 19 referred to announced restatements and five referred to announcements of material weaknesses in internal control over financial reporting. The two most common allegations, each involving one-third of the total actions, related to a company’s revenue recognition and internal accounting control violations, according to Cornerstone Research.

At the PCAOB, of the 15 individuals and 11 accounting firms that settled with the audit cops in 2021, monetary settlements were imposed on 18 (69%). Monetary settlements totaled approximately $1.1 million. And despite pandemic-related restrictions on travel, the percentage of PCAOB actions involving non-US respondents in 2021 (33%) returned to pre-pandemic levels and was comparable to the 2016-2019 average (31%).

One thought on “SEC and PCAOB Enforcers Took An Extended Smoke Break In 2021

  1. Take a good look at the PCAOB’s enforcement actions. Since inception, 85% were directed against non-Big Four (BF) firms. The BF audit about 45% of all SEC registrants by number and about 97.5% by market cap (MC).

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