SEC Commissioner Mark Uyeda, during a speech in London, said that both commission and the PCAOB have brought more charges against companies, accountants and auditors that violate financial reporting rules last year than previous years.
It is well known that the PCAOB has stepped up its enforcement activities under the leadership of Erica Williams, who became chair of the board in January 2022.
But also, “accounting violations is a focus for the SEC,” Uyeda said during a conference hosted by the Institute of Chartered Accountants in England and Wales (ICAEW) on May 12, 2023.
The SEC has authority to bring enforcement actions against companies as well as accountants and auditors. The PCAOB has authority to bring actions against accounting firms and accountants who audit public companies and broker-dealers registered with the SEC.
He said that in the fiscal year that ended Sept. 30, 2022, the SEC initiated 68 enforcement actions on accounting and auditing matters, which is a 55 percent increase from fiscal 2021. Of the 68 actions, only five were against those in foreign locations, which was fewer than previous fiscal years.
The most common violations were related to revenue recognition with 30 enforcement actions. Next highest was violations related to internal control over financial reporting with 28 actions.
Of the 68 actions, 36 were only against individuals, not a firm. This was 53 percent of the actions, and it was significantly higher than the five prior fiscal years, averaging 37 percent, he said.
During fiscal 2022, Uyeda said 38 individuals resolved the actions and paid fines of $20,000 in a median amount. As for firms, 27 resolved their cases and paid a median penalty amount of $1.8 million.
In comparison, the SEC filed 760 enforcement actions overall in fiscal 2022, which is a 9 percent increase over the prior year, according to the enforcement division’s data. The commission also recovered a record $6.4 billion in penalties and disgorgement.
Uyeda reminded companies that the SEC has authority beyond just imposing civil penalties.
The commission has also sought to recoup executive bonuses and profits from sales of company stock under Section 304 of the Sarbanes-Oxley Act of 2002.
“The SEC may recoup, on behalf of a company, any bonuses or incentive-based or equity-based compensation paid to, or profits realized from the sale of stock by, the company’s CEO or CFO if the company is required to restate its financial statements due to material noncompliance, as a result of misconduct, with financial reporting requirements,” Uyeda explained. “It is irrelevant as to whether the CEO or CFO was engaged in the misconduct.”
Under Section 954 of Dodd-Frank, the SEC made clawback rules stronger last year. Sec. 954 of PL111-203
National stock exchanges must require listed companies to adopt a clawback policy related to accounting restatements for both “Big R” and “little r” restatements. The SEC is currently reviewing proposals by the New York Stock Exchange and Nasdaq. (SEC to Take Extra Time to Decide on Proposed Clawback Rules by Stock Exchanges in the May 10, 2023, edition of Accounting & Compliance Alert.)
“The policy applies regardless of whether the noncompliance was due to misconduct,” Uyeda said. “Going forward, clawbacks pursuant to this rule may become a significant process that companies will need to go through whenever it engages in a restatement.”
He offered some advice for companies.
“A strong audit committee can help lower the likelihood of such violations by actively overseeing and understanding the accounting policies, estimates, and judgments made by management in their preparation of the financial statements,” he said. “Carrying out this duty requires insight into whether the controls and procedures related to financial reporting are effective.”
Moreover, he emphasized the audit committee’s responsibility to appoint, set fees and oversee the company’s external auditor.
“This responsibility includes determining that the auditor is independent under the myriad of rules that govern independence,” he said. “Finally, the audit committee should contribute to a culture of cooperation between management and the auditor, while still ensuring that differing views on important issues are raised to the committee.”
As for the PCAOB, which has a calendar-year end, brought 29 disciplinary actions in 2022, which is a 60 percent increase over 2021.
He added that the board fined $10.5 million in 2022, a huge increase compared to $1.1 million in 2021. Moreover, he said that 52 percent of the PCAOB’s actions in 2022 were against auditors in foreign locations, compared to 33 percent in 2021.
This article originally appeared in the May 22, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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