The number of enforcement actions brought against company auditors by the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) remained elevated in 2024, with 58 combined last year, which tracks overall figures in 2022 and 2023, according to a new report by the Brattle Group, a consulting firm.
“However, aggregate activity doesn’t tell the full story. SEC enforcement was significantly muted in 2024, and PCAOB activity in the second half of the year was at its lowest levels of any point in recent years,” said Alison Forman, a principal with Brattle who co-wrote the study, which was published on March 6, 2025.
In particular, the SEC initiated only seven actions in 2024, which is the lowest level of annual activity of any year in the sample Brattle used—enforcement actions initiated from 2018 to 2024.
The PCAOB disclosed only one-third, or 17 of 51, enforcement actions in the second half of 2024, the lowest number in the second half of any year in the sample.
The SEC and the PCAOB combined brought 59 enforcement actions in 2022 and 60 in 2023.
These numbers represent activities during the Biden administration when the commission was led by Gary Gensler who served from April 2021 to January 2025. Erica Williams has been chair of the PCAOB since January 2022.
By contrast, the report noted that during a portion of the first Trump administration from 2018 to 2021, the SEC and the PCAOB brought on average 37.75 enforcement actions each year, less than half during 2022 to 2024.
SEC v. Jarkesy
The “significant decline in SEC enforcement against auditors and the unexpectedly low PCAOB activity in the second half of the year was likely the result of the Supreme Court’s June 2024 ruling in SEC vs. Jarkesy, which deemed that the SEC’s use of administrative proceedings to seek financial civil penalties was unconstitutional, and related constitutional challenges facing the PCAOB,” said Forman, co-leader of the firm’s accounting practice.
The report noted that the high court’s ruling in SEC v. Jarkesy was probably the most important development last year impacting enforcement against auditors.
“Not only did it lead to lower enforcement activity in 2024, but it also permanently changed the way the SEC can pursue enforcement going forward and raised still-to-be-resolved constitutional questions about PCAOB enforcement,” Brattle said.
Previously, the SEC largely brought actions against auditors through in-house administrative proceedings.
Now, because it generally requires more time and resources to bring suits in a federal court, observers believe that the SEC may be more selective in bringing enforcement actions.
“Even before the Supreme Court’s decision in June 2024, the uncertainties raised by Jarkesy appeared to dampen auditor enforcement,” the report notes, citing the seven enforcement actions initiated by the SEC last year.
In addition to the impact that the ruling will have on SEC enforcement in the future, the decision “may have potentially far greater implications for the viability of PCAOB enforcement proceedings because the PCAOB does not have statutory authority to bring proceedings in federal court,” the report states.
John Doe v. PCAOB cases
The PCAOB’s enforcement authority has also been directly under attack. Auditors who face disciplinary proceedings sued the board anonymously, challenging the constitutionality of the board’s in-house proceedings.
They argued that the PCAOB is unlawfully prosecuting auditors by using judicial powers that are the purview of federal courts. They claimed that the PCAOB’s proceedings violate their Fifth Amendment right to due process and their right to a jury trial under the Sixth and Seventh Amendments.
Revisions to PCAOB Standards and Rules
The report says that the PCAOB’s revisions to its contributory liability rule and its quality control (QC) standards will likely have an impact on the board’s enforcement activities in the future.
In 2024 the PCAOB updated the auditor contributory liability standard from “recklessness” to “negligence,” aligning it with the same standard of reasonable care auditors are already required to exercise when they perform audits of a public company’s financial statements. Recklessness represents a level of culpability that is higher than negligence.
“Some industry observers believe that the amended Rule … may have ‘major consequences,’ including sanctions of professionals who make good faith judgments,” the Brattle report states.
The PCAOB last year also made significant changes to its QC standard. Firms are not only required to operate the QC system that they designed but must also monitor the system and take steps to fix areas that do not operate effectively.
Firms that audit more than 100 issuers are required to establish an external oversight function for the audit practice that includes at least one independent person who will, at the least, evaluate the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of the QC system.
The new standard “could be a catalyst for increased enforcement activity,” the Brattle report states.
This article originally appeared in the March 12, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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