In this report from Cornerstone Research, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2022, Cornerstone tells us that accounting and auditing enforcement activity by the SEC increased sharply in FY 2022, although surprisingly, the aggregate amount of monetary settlements declined sharply. Perhaps most interesting is the steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability and perhaps, by extension, spurring action by executives to prevent misconduct at their companies. The report found that over “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 [in April 2021] through the end of FY 2022, approximately 49% of actions were initiated against individual respondents only.” According to one of the co-authors of the report, “[u]nder Chair Gensler’s leadership, the SEC has identified ‘holding individuals accountable’ as a ‘key priority area’ in its enforcement program”…. 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.”
According to the report, the SEC disclosed that it brought 68 accounting and auditing enforcement actions in FY 2022, a 55% increase from the 44 disclosed in the prior fiscal year—the highest number since 2019, but still below pre-pandemic levels. All but two of the actions disclosed concurrent settlements. Interestingly, half of all of the actions reported (34 actions) were initiated in the fourth quarter of the SEC’s September 30 fiscal year, with 28% (19 actions) brought in September alone. Does the flurry of activity at the end of the fiscal year suggest that there may have been some pressure to achieve targets?
Of the 68 enforcement actions initiated in FY 2022, 18 referred to announced restatements only, five referred to material weaknesses in internal control over financial reporting only and 18 referred to both. Together, they represent 60% of the enforcement actions, which Cornerstone reports as “the highest level in recent years” and 1.5 times the average of 39% for the period FY 2017 to FY 2019. Improper revenue recognition was alleged in 25 actions, an increase over the 20 actions brought in FY 2021.
Among the actions involving restatements, the most common allegations involved revenue recognition and ICFR. Together, these violations were alleged in 63% of actions. Five actions alleged both inadequate ICFR and inadequate disclosure controls and procedures. There were also five allegations regarding auditor independence violations. One action in FY 2022 against a company and its CFO resulted from the SEC’s EPS Initiative.
FY 2022 also saw nine actions seeking SOX 304 clawbacks, a substantial increase over FY 2021, when there were only three actions, and the period from FY 2017 to FY 2020, where clawback actions averaged 3.6 per year. The report notes a 2022 speech by Grewal which makes plain the SEC’s strategy of using SOX 304 to impose individual accountability: “more is required to ensure accountability from senior executives at public companies and incentivize them to prevent misconduct at their firms. That’s why the Commission employed another tool in fiscal year 2022 and used Sarbanes-Oxley 304 to require several executives to return bonuses and compensation following misconduct at their firms, even though the executives were not personally charged with the underlying misconduct.” In one example, three former senior executives of an infrastructure company “were ordered to return nearly $2 million in bonuses and compensation after their company restated its financials following misconduct by another former official.”
In FY 2022, Cornerstone reports, there were 90 settlements, 65 of which involved monetary payments (27 firms and 38 individuals), for an aggregate of $625 million ($621 million for firms and $4 million for individuals). The total amount of monetary settlement represents a decline of over 60% from FY 2021, which Cornerstone indicates was partly the result of the absence of any settlements over $1 billion. One of the report co-authors indicated surprise “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.”
Civil penalties accounted for 67% of monetary settlements in FY 2022, with disgorgement and prejudgment interest accounting for 31% and 2%, nearly reversing the relative proportions of that data for the period FY 2017 to FY 2020, when civil penalties accounted for an average of about 35% of monetary settlements.
Of the 90 settling respondents in FY 2022, 24% offered cooperation or undertook remedial efforts; for eight respondents, cooperation, remedial efforts or self-reporting resulted in no monetary settlements.
Cornerstone reports that, in FY 2022, there were 103 respondents named in accounting- and auditing-related SEC actions, an almost 50% increase from FY 2021. With regard to SEC actions, 36 actions involved individuals only (53% compared to 34% in FY 2021), 19 involved only companies (28% compared to 43% in FY 2021) and 13 involved both (19% compared to 23% in FY 2021). In FY 2022, there were 66 individual respondents and 37 companies, compared to 38 individuals and 32 companies in FY 2021. From April 2021, the date of Gensler’s swearing-in, through the end of FY 2022, almost half of the actions (49%) were against individual respondents, compared with 35% during SEC Chair Clayton’s tenure. As noted above, Cornerstone attributes the increase to a change in strategy at the SEC to focus on “individual accountability” as a “key priority area” and a “pillar of the SEC’s enforcement program.”