Cornerstone Research Report: SEC Accounting and Auditing Enforcement Activity Increased Sharply in FY 2022
Total monetary settlements decreased substantially compared to FY 2021
LOS ANGELES, April 27, 2023 /PRNewswire-PRWeb/ -- The U.S. Securities and Exchange Commission's accounting and auditing enforcement activity increased sharply in fiscal year 2022, while monetary settlements dropped substantially, according to a new report released today by Cornerstone Research.
The report, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2022, found that, in FY 2022, the SEC publicly disclosed 68 accounting and auditing enforcement actions, a 55% increase from the prior fiscal year, but still below pre-pandemic levels. Half of those actions were brought in the fourth quarter, with 28% of all FY 2022 actions initiated in September alone, the last month of the SEC's fiscal year. Monetary settlements totaled $625 million, down more than 60% from FY 2021, and 44% lower than the average total monetary settlements between FY 2017 and FY 2021. Total monetary settlements dropped due, in part, to the absence of any very large settlements (i.e., those over $1 billion).
"Accounting and auditing enforcement activity increased sharply, making up 15% of the 462 new or 'stand-alone' actions initiated by the SEC in FY 2022," noted Elaine Harwood, a report coauthor, senior vice president, and head of the accounting practice at Cornerstone Research. "However, it was surprising to see such a marked decline in monetary settlements—not only in relation to total monetary settlements in the past few years, but also in relation to the SEC's record $6.4 billion in total penalties and disgorgement in FY 2022."
The civil penalties imposed in FY 2022 represented 67% of total monetary settlements, up from 56% in FY 2021. The high proportions of civil penalties to total monetary settlements in both FY 2021 and FY 2022 represented a shift from the FY 2017–FY 2020 period, where civil penalties averaged around 35% of total monetary settlements.
Of the 68 enforcement actions, 41 referred to announced restatements and/or material weaknesses in internal control over financial reporting, the highest level in recent years. The percentage of initiated actions referring to these areas (60%) was 1.5 times the FY 2017–FY 2021 average. The SEC's most common allegations in FY 2022 involved revenue recognition and internal control over financial reporting. One or both violations were alleged in more than 63% of FY 2022 actions.
"In FY 2022, there was a substantial increase in actions alleging violations of Section 304 of Sarbanes-Oxley," added Simona Mola, a report coauthor and principal at Cornerstone Research. "The SEC initiated nine actions alleging violations of the so-called 'clawback' provision, compared to just three such actions in FY 2021 and a total of 18 actions initiated in the five-year period between FY 2017 and FY 2021."
There were 103 respondents named in accounting and auditing-related SEC actions in FY 2022, an increase of nearly 50% from the 70 respondents in FY 2021, but slightly lower than the average number of 111 respondents from FY 2017 through FY 2021. More than half of all actions involved individual respondents only, a sharp increase from the FY 2017–FY 2021 average of 37%. Following Chair Gary Gensler's swearing-in through the end of FY 2022, approximately 49% of actions were initiated against individual respondents only.
"Under Chair Gensler's leadership, the SEC has identified 'holding individuals accountable' as a 'key priority area' in its enforcement program," noted Alison Forman, a report coauthor and principal at Cornerstone Research. "So, it is not a surprise that the percentage of actions initiated against individual respondents in FY 2022 was notably higher than those actions initiated during Jay Clayton's administration."
Additional Trends:
- Of the 68 actions initiated during FY 2022, 51 were administrative proceedings and 17 were civil actions.
- The SEC acknowledged that 24% (17 firms and five individuals) of the 90 respondents who settled in FY 2022 offered cooperation and/or undertook remedial efforts, up from 20% in FY 2021.
- In FY 2022, actions initiated in the first quarter (nine) were at the lowest level in recent years.
- For the fourth year in a row, enforcement activity in the second quarter of the fiscal year (i.e., the first quarter of the calendar year) was lower than in other quarters.
- The SEC initiated five actions in FY 2022 alleging violations of auditor independence, compared to four such actions initiated in FY 2021.
- The SEC initiated five actions against non-U.S. respondents, lower than the average of 10 actions per year from FY 2017 to FY 2021.
EDITOR'S NOTE: Previous reports have jointly analyzed data from the SEC and the Public Company Accounting Oversight Board (PCAOB). This year marks the first time the data has been segmented into separate reports. See Cornerstone Research's separate report on PCAOB Enforcement Activity—2022 Year in Review. Additionally, this year's report analyzes data from the SEC's fiscal year, whereas previous reports analyzed calendar year data.
About Cornerstone Research
Cornerstone Research provides economic and financial consulting and expert testimony in all phases of litigation and regulatory matters. The firm supports clients with rigorous, objective analysis. Working with an extensive network of leading academics, former regulators, and industry specialists, Cornerstone Research identifies the most qualified experts for every case.
Founded in 1989, Cornerstone Research has always been guided by its core values: commitment to clients, experts, and staff, and to delivering consistently high-quality service. The firm has over 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.
Media Contact
Liz Sobe, Cornerstone Research, 617.927-3176, [email protected]
SOURCE Cornerstone Research
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