The Number of Accounting & Auditing Cases Increased in FY2023

There was a 22% increase in the number of accounting and auditing cases filed by the SEC in FY 2023, according to a new report published by Cornerstone Research, SEC Accounting and Auditing Enforcement Activity (here). The Report goes on to discuss key points regarding the actions initiated during the last Government fiscal year and compare them with those from earlier periods.

The Report begins by noting that 83 accounting and auditing enforcement actions were filed during FY2023. That represents a 22% increase over the prior year. It is also the highest number of accounting and auditing cases filed by the agency since 2019. The 44 actions initiated by the Commission during the fourth quarter of the fiscal year represented over half of the cases initiated during the period. This is also the largest number of cases filed in a single quarter in recent years, according to Cornerstone.

Cornerstone also found that 41 of the 83 actions filed referred to either a restatement and/or a material weakness in internal controls. Accordingly, over half of the cases were not identified as involving a restatement or being based on a material weakness in internal controls.

Most of the cases identified as involving an accounting or auditing issue were filed as administrative proceeding. All but 5 of those cases were settled at the time of filing. The Commission also filed 12 civil injunctive actions that are included in this group of cases. That represents a small decrease in number compared to the prior fiscal year. At the end of the fiscal year over half of those cases had not been resolved.

In fiscal 2023 the Commission initiated 11 of the actions in this group against non-U.S. parties. That represents an increase over the average of 9 filed from FY 2018 to FY 2022. The actions were brought against parties in Canada, the Netherlands, Ireland, the United Kingdom, Singapore and China.

The most common allegations in the 83 actions filed tied to revenue recognition and/or internal controls. One or both of those allegations were made n 63% of the cases filed during the period. Only 4 actions involved claims based on auditor independence, a small decline from the prior year. The number of cases involving a Section 304 claim also declined compared to the prior year.

Less than half of the cases brought by the Commission involved individuals. Cases that did involve individuals constituted 41% of those filed during the period. Nearly half of the individuals involved were either a CEO or CFO – 12 individuals who were either a CEO or CFO were involved in the cases. In contrast, 17 of the individuals involved were members of the board of directors.

Finally, the amount of civil penalties imposed in 2023 represented less than half of the total monetary settlements. Specifically, only 33% of the total monetary settlements were penalties – 67% represented disgorgement and prejudgment interest.

Last week the Commission filed two new actions. One centered on insider trading and was partially resolved. The second focused on violations of Rule 105 by an investment adviser. The proceeding was resolved.

Be careful, be safe this week.

SEC

Remarks: SEC Chairman Gary Gensler delivered remarks tilted “AI, Finance, Movies and the Law,” at Yale Law School on February, 13, 2024 (here). The Chairman’s remarks used well known lines from various films to illustrate points regarding SEC enforcement actions that might stem from or involve IA.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 1 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Insider trading: SEC v. Loudon, Civil Action No. 24-cv-622 (S.D. Tx. Filed February 22, 2024) is an action which names as defendant Tyler Loudon who resides in Huston Tx. His wife is an M&A manager for BP p.l.c. On February 16, 2023, TravelCenters of America, Inc., a full service truck stop and travel center based in Ohio announced it had signed an agreement to be acquired by BP. Prior to the announcement Defendant misappropriated material, confidential information about the transaction from his wife. He then purchased 46,450 shares of TravelCenters stock. Following the deal announcement the share price increased about 70.8%. Mr. Loudon sold his shares for over $1.76 million in profits. The complaint alleges violations of Exchange Act Section 10(b). Defendant partially resolved the action, consenting to the entry of a permanent injunction based on the Section cited in the complaint. The U.S. Attorney’s Office for the Southern District of Texas announced parallel criminal charges.

Rule 105: In the Matter of Contrarian Capital Management, LLC, Adm. Proc. File No. 99578 (February 21, 2024) is a proceeding which names the registered investment advisor as a Respondent. In two instances between April 2020 and July 2020 Respondent purchased offering shares for clients from an underwriter or broker-dealer participating in a follow-on or secondary public offering of stock. Yet Respondent caused at least one advisory client to sell short the same security during the Rule 105 restricted period. In each instance the short sale booked as a result of the assignment of previously sold call options during the five business day period that preceded the pricing of the offering, thereby violating Rule 105. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on Rule 105. In addition, the firm will pay disgorgement of $351,726.86, prejudgment interest of $29,600.50 and a penalty of $140,000.

FinCEN

Meeting: The Financial Crimes Enforcement Network or FinCEN held its first exchange with Puerto Rican Financial Institutions and Law Enforcement, according to a released dated February 222, 2024. The purpose of the meeting was to facilitate cooperation between the agency and officials in Puerto Rico (here).

Hong Kong

Remarks: Julia Leung, Hong Kong Securities & Futures Commission, delivered remarks at the Launch Ceremony of Greenhouse Gas Emissions Calculation and Estimation Tools event, February 21, 2024 (here). Her remarks focused on the institution of the new calculation tools.

Singapore

Publication: The Monetary Authority of Singapore or MAS published a consultation paper titled “Good Practices for Auditors of Fund Management Companies,” dated February 2024 (here).

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