Charges against six accountants, including former staff of the US audit regulator and audit firm KPMG LLP, were among the biggest accounting and auditing enforcement cases brought by the SEC in the past year.
The overall number of financial reporting related cases dropped by a quarter compared to 2017, however, according to the Securities and Exchange Commission’s annual enforcement report, released November 2.
Fifty-four organisations and 94 individuals faced sanctions and penalties arising from 79 separate accounting-related cases. The commission brought 95 such cases the prior year, the report said.
The cases spanned revenue and expense recognition, valuation and impairment, disclosures, misrepresentations, and internal controls.
In addition to facing SEC sanctions, including professional bars, the six accountants charged with trying to steal inspection information from the Public Company Accounting Oversight Board in order to subvert the inspections process also faced criminal charges. Three have pleaded guilty to date.
The SEC took no action against KPMG, which alerted regulators to the scheme.
Accounting fraud remains a high priority for the SEC. The cases brought this year reflect the commission’s focus on holding individuals accountable, Anita Bandy, associate director of enforcement for the SEC, told a securities enforcement forum in Washington on November 1.
Three accountants at BDO USA LLP also faced SEC sanctions this year for predating audit paper work and signing blank audit papers, among other unprofessional conduct that violated securities laws and auditing standards.
RSM US LLP was censured for repeatedly violating professional standards, including lack of supervision and assigning unqualified staff to oversee certain aspects of an audit. Two RSM auditors were barred or suspended by the SEC last year in connection with the case.
Accounting-related enforcement cases have been dropping in recent years, reflecting a change in priorities at the SEC to focus on individual accountability and cases with greater impact on retail investors.
“Accounting fraud cases are very complex. The SEC is investigating not only the issuer itself, but the auditor. That can take a long time,” said Margaret Gembala Nelson, accounting, securities and auditor liability counsel with Foley & Lardner LLP.
Auditor-focused cases have also dropped even though SEC officials say that gatekeepers, including auditors, remain a focus, Nelson said.
“We saw plenty of fraud of cases or material misstatement cases brought against the issuer. But you didn’t see a companion case brought against the auditor,” Nelson said.
The reduction in cases doesn’t mean however that there is less enforcement. Timing, budgets and even prioritising more significant cases over smaller cases all could change the total for the year, said Brian Neil Hoffman, securities defence counsel with Holland & Hart LLP.
“I’m not sure, if I’m at a public company or accounting firm, I would take a lot of solace that the number of cases is down slightly in any given year,” Hoffman told Bloomberg Tax.
Other cases included charges against Walgreens Boots Alliance Inc executives for misleading investors after the company didn’t disclose that it might miss promised projections as the result of a merger.
Accounting standards including revenue recognition and overstating assets, along with misrepresenting key metrics or misleading disclosures, are areas of focus for the SEC. Some cases resulted in significant penalties this year, Bandy said.
Maxwell Technologies Inc was hit with a $2.8mn penalty stemming from accounting fraud charges that resulted in the California energy company improperly recognising more than $19mn in revenue. Three executives, including the corporate controller and chief executive officer, were also penalised.
And Barrett Business Services Inc, faced a $1.5mn penalty as the result of accounting fraud involving the company’s self-insured workers compensation. The company restated several years’ worth of financial reports and the corporate controller was suspended for one year.