SEC Upped the Ante on Enforcement for Accounting and Auditing in FY 2023

A new report released on Wednesday reveals that the Securities and Exchange Commission (SEC) increased accounting and auditing enforcement actions by 22% last year, but monetary settlements dropped for a second straight year.

The report, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2023, from Cornerstone Research found that the SEC publicly disclosed 83 accounting and auditing enforcement actions in fiscal year 2023, up from 68 in FY 2022 and the highest number of actions initiated since FY 2019. More than half of the 83 enforcement actions were brought in Q4 of FY 2023, and 28% were initiated in September alone—the last month of the fiscal year.

“The 22% increase in accounting and auditing enforcement activity in FY 2023 outpaced the 8% increase in original enforcement actions brought by the SEC, suggesting an increased focus by the enforcement division on these matters,” Steve McBride, a report co-author, principal, and co-head of the accounting practice at Cornerstone Research, said in a statement.

Despite the SEC reporting $4.9 billion in total monetary settlements in FY 2023—the second highest on record—monetary settlements in accounting and auditing enforcement actions totaled $583 million, a 7% decrease from the prior fiscal year and 47% lower than the average of total monetary settlements in the prior five fiscal years.

Disgorgement and prejudgment interest accounted for 67% of total monetary settlements imposed in FY 2023, while civil penalties accounted for 33% of the total monetary settlements. FY 2023 was the first time that civil penalties comprised less than half of total monetary settlements since FY 2020, according to Cornerstone Research.

“The decline in monetary settlements during FY 2023 may be due, in part, to a continued increase in the SEC’s consideration given to cooperation and remedial efforts when imposing monetary settlements,” said Simona Mola, a report co-author and principal at Cornerstone Research. “Such consideration may translate in lower monetary settlements but not necessarily in no penalties at all. In fact, the proportion of respondents who received no monetary settlement decreased from last fiscal year.”

The SEC noted that 26% of respondents who settled in FY 2023 offered cooperation, undertook remedial efforts, and/or self-reported to the SEC, up from 24% in FY 2022.

In addition to monetary settlements, the SEC imposed non-monetary sanctions—such as officer and director bars and requirement to retain an independent consultant—on individuals and firms. Officer and director bars imposed on individual respondents who settled in FY 2023 increased from 18% in FY 2022 to 31%.

Of the 83 enforcement actions, 35 referred to announced restatements of financial statements, and 32 referred to announcements of material weaknesses in internal control. Actions referring to announced restatements and/or material weaknesses in internal control remained at 41, the highest level since FY 2021, according to Cornerstone Research. The percentage of initiated actions referring to an announced restatement and material weakness in internal control (31%) reached its highest level in recent years. Consistent with FY 2022, the SEC’s most common allegations related to a company’s revenue recognition and internal accounting controls: one or both violations were alleged in 63% of FY 2023 actions.

Additional findings from the report include:

• Of the 83 actions initiated during FY 2023, 71 were administrative proceedings and 12 were civil actions.
• The SEC issued non-monetary sanctions against 50% of individual respondents who settled in FY 2023, down from 62% of individual respondents who settled in FY 2022.
• There were 111 total respondents in accounting and auditing enforcement actions initiated in FY 2023, a slight increase from the 103 respondents in FY 2022.
• In FY 2023, the SEC initiated 11 actions against non-U.S. respondents, higher than the average of nine actions per year from FY 2018 to FY 2022.
• The SEC initiated one action in FY 2023 as part of its continuing Earnings Per Share (EPS) Initiative, its fifth action imposed in connection with the EPS Initiative since its inception in 2020.
• The SEC initiated three actions with alleged violations of Section 304 of Sarbanes-Oxley (“clawback” provision) in FY 2023, a sharp decrease from the nine actions initiated in FY 2022 and below the yearly average of five actions initiated in FY 2018-FY 2022.