Accounting and Auditing Enforcement Activity Declines Slightly in 2019

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Cornerstone Research report: Actions involving revenue recognition increase

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“During 2019, accounting enforcement actions increasingly involved announcements of a restatement or a material weakness in internal control, with most of those matters being brought by the SEC.” - Alison Forman, a principal at Cornerstone Research

The U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) publicly disclosed a combined 81 accounting and auditing enforcement actions during 2019, down slightly from the previous year, according to a Cornerstone Research report released today. Monetary settlements totaled approximately $628 million, $626 million of which was imposed by the SEC.

Cornerstone Research’s report, Accounting and Auditing Enforcement Activity—2019 Review and Analysis, examines publicly disclosed SEC and PCAOB enforcement actions that involve accounting and auditing. The most common allegations in 2019 SEC actions involved financial reporting issues, with revenue recognition violations comprising the largest share. The percentage of PCAOB actions involving revenue recognition increased in 2019.

“More than one in four actions publicly disclosed by the SEC and PCAOB in 2019 involved revenue recognition,” said Elaine M. Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice. “The SEC and PCAOB have highlighted revenue recognition as one of the areas that may present challenges as a result of the economic impact of COVID-19. We will continue to monitor these developments and the effects on accounting and auditing enforcement.”

Enforcement actions involving announcements of restatements or internal control weaknesses increased by 65%. The percentage of 2019 SEC actions involving announced restatements and/or material weaknesses in internal controls (42%) was nearly double the 2018 percentage (23%).

“During 2019, accounting enforcement actions increasingly involved announcements of a restatement or a material weakness in internal control, with most of those matters being brought by the SEC,” said Alison Forman, a principal at Cornerstone Research. “With several new accounting standards recently taking effect, we expect this trend may continue.”

Highlights

  • In 2019, the SEC initiated 57 enforcement actions involving accounting and auditing allegations, an 11% decline from the 64 actions in 2018, but near the 2014–2018 average. The SEC brought only 5% of accounting and auditing actions as civil actions, the lowest percentage since 2016.
  • The PCAOB publicly disclosed 24 auditing-related enforcement actions in 2019, up 26% compared to 2018, the year in which the PCAOB disclosed its lowest number of actions since 2014.
  • The percentage of SEC and PCAOB actions involving non-U.S. respondents declined, but remained above the 2014–2018 average.
  • At 115, the total number of respondents in 2019 SEC and PCAOB actions was 23% below the 2014–2018 average.
  • The SEC and PCAOB imposed monetary penalties against 84% of firms and 63% of individual respondents. The median penalty the SEC imposed on firms in 2019 was $4.1 million, nearly three times greater than the 2018 median.

About Cornerstone Research
Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for more than 30 years. The firm has over 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.

See Cornerstone Research’s website for more information about the firm’s capabilities in economic and financial consulting and expert testimony.

http://www.cornerstone.com
Twitter: @Cornerstone_Res

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Jason Milch
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Elisabeth Gaubinger
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