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Aligning Strategic Finance with SEC Requirements

Over the past few years, the U.S. Securities and Exchange Commission (SEC) has homed in on potential fraud and financial misstatements by auditors and other “gatekeepers” of publicly traded companies. When the SEC announced charges against three auditors for “violating federal securities law” and “failing to comply with U.S. auditing standards” in September 2013, it also publicized Operation Broken Gate, an ongoing measure to protect investors.1

As a result, concerns about accounting accountability and enterprise-wide strategic finance have come to the forefront not only at large accounting firms but also their client companies. Why? Because responsible parties that bear fiduciary responsibility at public companies for producing fair and accurate financial reporting (e.g., CEOs, CFOs, audit committees) are also under closer scrutiny by the SEC.2

While there is no known reason for the initiation of Operation Broken Gate, there are several possibilities. For example, it could be to further prevent large-scale fraud like the Bernie Madoff scandal. It could also be because of the consolidation of the largest accounting firms and assumption they are “too big to fail.”3 Whatever the reason, every employee at an auditing firm would benefit from learning and complying with the law in order to avoid issues with the SEC.

What You Need to Know

Here are some of the key things to be aware of in relation to Operation Broken Gate:

1. Increased Enforcement and Widespread Accountability

In an October 2013 speech, SEC Chair Mary Jo White emphasized the severity of Operation Broken Gate. She warned SEC surveillance would be more far-reaching than ever before and that auditors and fiduciaries who neglected their duty would be vigorously sought out and dealt with. In a supporting statement, SEC Co-Director of the Division of Enforcement Andrew Ceresney said that in the event of “improper accounting,” the SEC would hold “the engagement partner, engagement quality reviewer, and the auditing firm” responsible in addition to the “CEO, CFO, and Controller.”4

2. Public Release of Initial Enforcement Actions

There is a database of chronological, sequentially numbered Accounting and Auditing Enforcement Releases (AAERs) on the SEC website; at the end of the fiscal year, the SEC also releases a report of these AAERs. Audit firms and individual auditors who appear in an AAER not only risk damage to their reputation but may also face civil monetary penalties and lose the privilege of practicing before the SEC.5

3. Quality Control Defects Should Be Taken More Seriously

Issues that appear in Public Company Accounting Oversight Board (PCAOB) reports, which were previously treated as quality control defects, also appear in AAERs. Therefore, they are considered grounds for an SEC investigation. Some of the most common examples include:

  • Failed to exercise due professional care
  • (The auditor) was not independent with respect to the audit services
  • Failed to consider fraud risks
  • Failed to prepare and retain adequate audit documentation
  • Failed to evaluate and assess the adequacy of the issuer’s disclosure of related party transactions.6

6. Additional Penalties and Consequences

While the SEC can “impose fines, revoke or suspend licenses, seek injunctions, and even refer individuals for prosecution,” it can’t directly send wrongdoers to jail. However, the SEC works with government authorities and other bodies of oversight, such as the U.S. Department of Justice, to impose greater penalties and consequences when necessary. SEC Chair White views fierce punishment, such as 20-plus-year sentences for CEOs convicted of fraud, as a strong deterrent to wrongdoers.7

7. Greater Risk to Public Companies

In the event an auditor is charged by the SEC, the client company and its stockholders may be negatively impacted. In addition to facing costly audits to correct any deficiencies in its financial statements, the client company may face additional scrutiny and risk a negative market reaction (e.g., falling stock prices).8

Based on this information, auditing firms might benefit from aligning strategic finance processes with the SEC’s most up-to-date requirements. One way to accomplish this is by reviewing the charges listed in AAER reports; this would allow auditors to identify and resolve potential issues in quality control and training.9

Fiduciaries and other internal audit participants at client companies might also consider taking similar measures.

Looking to Become a Leader in Strategic Finance?

The Online Master of Accountancy program at The University of Scranton can help you comprehend and employ skills needed for identifying and navigating red flags that could indicate occupational fraud. To learn more or speak with a Program Manager, call 866-373-9547.

1. “SEC charges three auditors in continuing crackdown on violations or failures by gatekeepers.” (accessed September 25, 2016).
2.-9. Boyle, D., Boyle, J., Carpenter, B. and Mahoney, D. “Operation broken gate: the SEC is holding gatekeepers accountable.” (accessed September 26, 2016).