September 2, 2021

Enforcement: Financial Reporting & Auditing Cases

Credibility International recently released this report on 2020 SEC & PCAOB enforcement activity relating to financial reporting, auditing, and accountants’ professional responsibilities. Overall, the report says that the SEC and PCAOB brought actions against 125 respondents in new matters. Of these, 62% were brought against individuals and 38% were brought against entities.

In addition to quantitative data on enforcement actions, the report also discusses significant themes of the SEC & PCAOB’s enforcement program. This excerpt includes observations on 2020 actions targeting revenue recognition and related disclosures that didn’t involve alleged GAAP violations:

A second important observation arising from 2020 activity is the prevalence of revenue recognition cases alleging revenue disclosure violations with no related alleged GAAP violation. These cases related to: (1) disclosures about known trends and uncertainties in Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”), and (2) reporting of sales-related key performance indicators (“KPIs”) and the presentation of non-GAAP financial measures related to revenue recognition.

Further, given the SEC’s increased focus in recent years on non-GAAP financial measures and on disclosures contained outside the audited financial statements, we anticipate continued enforcement activity in this area, regardless of whether alleged revenue violations result in material misstatements of GAAP financial statements.

Other major enforcement themes addressed in the report include ICFR & disclosure controls and procedures, gatekeepers, cooperation credit and remediation, and audit firm quality control systems. The report also identifies a number of emerging areas that may become enforcement priorities. These include asset impairment, valuation, earnings management, blank check companies, and COVID accounting and disclosure.

John Jenkins