Securities Regulation Daily Enforcement officials stress importance of auditor independence, gatekeeping role at AICPA conference
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Monday, December 16, 2019

Enforcement officials stress importance of auditor independence, gatekeeping role at AICPA conference

By Amanda Maine, J.D.

One official recognized that there is often immense pressure to meet earnings estimates, which can result in conduct leading to an SEC enforcement action.

Speaking at the AICPA’s Annual Conference on Current SEC and PCAOB Developments, SEC enforcement accountants provided an update on the Division’s efforts to combat financial fraud and misconduct and to hold accountants and auditors to their gate keeping responsibilities. Enforcement Chief Accountant Matt Jacques observed that financial fraud enforcement is especially challenging, given the complexity of financial statements. Sophisticated companies can go to great lengths to obscure misconduct, and going after these frauds involves examining a tremendous amount of documents and data, Jacques said.

Auditor independence. According to Jacques, pursuing cases of auditor idependence has been a priority for the Division. One such case involved settling charges with PwC for violating independence rules on non-audit services. RSM US LLP was also sanctioned for providing non-audit services to its audit clients’ affiliates. In addition, the SEC settled with Deloitte Touche Tohmatsu LLC (Deloitte Japan), which allegedly issued audit reports for an audit client when dozens of its employees maintained bank accounts with a client’s subsidiary. Deloitte Japan agreed to pay $2 million in disgorgement and penalties, and the firm’s CEO and director of independence were suspended from practicing before the Commission.

Proactive approach. Senior Enforcement Accountant Tonya Tullis touted the proactive initiatives of the Enforcement Division, including obtaining asset freezes. The Division won orders to freeze the assets of defendants in some high-profile cases, including the Woodbridge $1.2 billion Ponzi scheme (which eventually returned $1 billion to defrauded investors), the Veritaseum digital token fraud, and the fraud perpetrated by cash advance company 1 Global Capital.

Auditors as gatekeepers. Supervisory Accountant Peter Rosario emphasized the role of auditors as gatekeepers for investors and reiterated that the Enforcement Division will continue to go after auditors that fail in their gatekeeping mission. As an example, he pointed to the SEC’s enforcement action against KPMG, where former PCAOB staffers who were employed at KPMG schemed with PCAOB staffers to steal nonpublic information relating to KPMG’s upcoming PCAOB inspection. In addition to admitting to serious misconduct, KPMG agreed to pay a $50 million penalty.

Auditing related-party transactions is another area that firms should monitor, Rosario said. The guidance on related-party transactions is clear and straightforward and has been unchanged for decades, yet the Enforcement Division continues to find violations, according to Rosario. Earlier this year, as Rosario described, the SEC brought charges against an Israel-based auditing firm that performed deficient audits for four companies that created and marketed shell companies. Dov Weinstein & Co. and its principal ignored red flags that should have alerted them that the shell companies were actually controlled by the other shell companies. Rosario also remarked that the fact that the enforcement action was brought against an Israeli firm shows the global reach of the SEC’s enforcement powers.

Rosario cited the Division’s case against the former CEO of Function(X), an online entertainment and publishing business, as a template for auditors for pushing back against executives and management. According to Rosario, after the outside auditor raised questions about some of the company’s documents and the CEO’s assertions, the company retained an outside firm to investigate. The auditor then resigned and penned a letter describing the misconduct.

Non-GAAP measures. Senior Enforcement Accountant Justin Sutherland said that the use of non-GAAP measures should be accurate, consistent, and disclosed. The SEC instituted proceedings against REIT Brixmor Property Group for manipulating a key non-GAAP metric related to the company’s performance. Sutherland noted that the scheme was carried out by senior executives and also resulted in criminal charges.

In another non-GAAP enforcement action, the Division settled with Fiat Chrysler for falsely reporting new vehicle sales and falsely touting a "streak" of uninterrupted monthly year-over-year sales growth up through 2016 even though the streak had been broken in September 2013. Fiat Chrysler agreed to pay $40 million to settle the charges, Sutherland said.

Pressure to meet estimates. Enforcement Accountant Jamie Wohlert described several recent cases where pressure to meet analyst earnings estimates led to bad behavior. In one proceeding, the SEC alleged that an officer at PPG Industries made improper accounting determinations and directed subordinate personnel to delay recording or not to record certain expense accruals to inflate the company’s financial results. Wohlert noted that the SEC did not impose monetary sanctions on PPG due to the company’s prompt self-reporting and cooperation with Enforcement staff.

Corporate pressure to meet earnings estimates also led to actions resulting in sanctions against Comscore Inc. and Hertz as well as culpable executives, Wohlert advised. Information and media analytics firm Comscore entered into non-monetary transactions for the purpose of improperly increasing its reported revenue at the direction of its then-CEO. Comscore and the CEO agreed to pay penalties of $5 million and $700,000, respectively, and the CEO agreed to claw back $2.1 million in incentive-based compensation and profits from stock sales. And Hertz’s "pressured corporate environment" on budgets and earnings estimates was a factor in the company materially misstating pretax income, requiring the company to issue restatements. In settling the SEC’s charges, Hertz agreed to pay a civil penalty of $16 million. Separately, the company’s comptroller was suspended from practice before the Commission and agreed to pay $96,000 in penalties and disgorgement, Wohlert observed.

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