The Securities and Exchange Commission (SEC) provides a list of certain enforcement actions related to financial reporting concerning administrative proceedings and civil lawsuits. These Accounting and Auditing Enforcement Releases (AAERs) are reviewed by Audit Analytics and key data points are extracted.[i]
Since 1999, the SEC has issued over 2,700 Accounting and Auditing Enforcement Releases (AAERs) involving over 800 entities and more than 2,500 individuals. About two-thirds of these releases were published in the years prior to 2010. The overall average number of AAERs issued per year (since 1999) is just over 140 releases, but in the past 10 years, the average number of AAERs issued per year is just over 100.
The 94 AAERs released in 2018, while higher than the previous year, appears to be consistent with this overall downward trend in the number of releases issued.
Of the proceedings instituted in 2018, 42 involve Rule 102(e) of the Commission’s Rules of Practice, which authorizes the SEC to, among other things, impose discipline when “improper professional conduct” has occurred, and four proceedings granted applications for reinstatements. Throughout the year, AAERs barred or suspended four audit firms and 43 individuals from appearing and practicing before the Commission as an accountant.
In these releases, since 1999, more than 800 respondents have been denied the privilege of appearing or practicing before the Commission as accountants and almost 100 have been granted reinstatement.[ii]
Besides Rule 102(e), 40 proceedings were pursuant to, among other
things, Section 21C of the Securities Exchange Act of 1934 – Cease-and-desist proceedings.
The amount of monetary penalties ordered by the Commission in AAERs in almost 20 years totals over $13 billion. The top 5 penalty amounts recorded total nearly $5.8 billion. Also worth noting, one out of the top five penalties was against an individual involved in wrongdoing.
Since 1999, the highest monetary penalty was related to the SEC’s proceedings involving WorldCom, one of the biggest financial frauds in history. In 2003, WorldCom was found liable for a civil penalty in the amount of $2.25 billion after years of falsely inflating net income and erroneously recording expenses as investments to improve the appearance of cashflows. In the wake of the WorldCom scandal, the Sarbanes-Oxley Act of 2002, which serves to increase transparency in corporate disclosures, was enacted, demonstrating the magnitude of the misconduct.
In 2018, the highest amount of monetary penalties ordered for a respondent was over $1.78 billion. That penalty was imposed on Petróleo Brasileiro S.A – Petrobras [PBR] after years of facilitating bribes totaling hundreds of millions of dollars in payments and engaging in myriad activities to conceal the bribes from regulators and investors, in violation of numerous laws including the Foreign Corrupt Practices Act (FCPA).
While in some cases penalties for respondents can reach the billions, the overall average amount of monetary penalties for a single respondent is about $8.5 million. Since 2003, the average penalty per year has been above $1 million, with spikes above $30 million for 2003 and 2018, corresponding with the top two highest monetary penalties. The median amount of monetary penalties from 1999 to 2018 is $100,000 for a single respondent.
Of the more than 70 individuals who were respondents in AAERs during 2018, more than half are listed as audit partners and team members, CFOs, and CEOs. Audit firms and SEC issuers account for about 9% and 33%, respectively, of the respondents in 2018.
AAERs define certain issues and violations by the respondent(s) or related parties in the action. Audit Analytics identifies these issues and classifies them into several general categories. The majority of AAERs over the year include issues relating to, among other things, false and misleading statements, financial/accounting records, internal controls, improper professional conduct and audit deficiencies.
Issues relating to the Foreign Corrupt Practices Act (FCPA), bribery schemes and improper payments contributed to some of the highest amounts of monetary penalties throughout 2018.
Altaba, Inc. [AABA] and Hertz Global Holdings, Inc. [HTZ] also make the list of top monetary penalties for the year. In April 2018, the Commission ordered Altaba (f/d/b/a Yahoo! Inc.) to cease and desist from committing or causing violations and pay a civil penalty of $35 million in relation to material misstatements and omissions by the Company regarding its massive 2014 cybersecurity data breach. Last month, Hertz was found to have materially misstated its pretax income from 2012 through 2014 due to accounting errors and was ordered to pay a $16 million civil penalty, as well as cease and desist from committing or causing violations.
Other types of actions in 2018 include: nine proceedings arising out of violations of the Regulation S-X requirement that interim financial statements filed as part of a Form 10-Q must be reviewed by an independent public accounting firm prior to filing, four insider trading actions, two releases pertaining to the unauthorized disclosure of confidential information from the PCAOB, ten suspensions due to felony convictions, five releases involving the use of an unregistered or barred auditor, and more.
It is important to note that the published list of SEC Accounting and Auditing Enforcement Releases is intended to provide highlights of undertaken actions and is not an exhaustive list, but it provides valuable insights into enforcement activities related to financial reporting.
For more information on the AAER database maintained by Audit Analytics, please contact us at (508) 476-7007 or firstname.lastname@example.org.
[i] Data is based on the list of AAERs made available by the SEC on their website at https://www.sec.gov/divisions/enforce/friactions.shtml. The list provides links to financial reporting related enforcement actions concerning civil lawsuits brought by the Commission in federal court and notices and orders concerning the institution and/or settlement of administrative proceedings. This list only highlights certain actions and is not meant to be a complete and exhaustive compilation of all of the actions that fall into this category. The 1999 AAER archive only indexes releases with AAER numbers through October 18, 1999 (AAER-1190).
[ii] A single release may involve more than one rule or section of law, respondent, issue, and order, and the SEC may issue more than one order for a single respondent in a given release.