In 2021, a year characterized by the continued challenges of the COVID-19 pandemic and changes in leadership at both the SEC and the PCAOB, accounting and auditing enforcement activity decreased and monetary settlements fell sharply. Together, the SEC and PCAOB publicly disclosed 52 accounting and auditing enforcement actions in 2021, nearly two-thirds of which were SEC actions. Monetary settlements totaled approximately $159 million, almost all of which were imposed by the SEC, a decline of nearly 90% from $1.4 billion in 2020.

SEC Overview

During the first year of the new administration, the U.S. Securities and Exchange Commission (SEC) initiated 34 enforcement actions involving 26 individuals and 20 firms, a decrease in enforcement activity for the third consecutive year. All of these enforcement actions were initiated as administrative proceedings. In 2021, 49 respondents settled charges that the SEC had brought in 2021 or prior years. Monetary settlements were imposed on 44 (90%) of those respondents and totaled approximately $158 million. In 11 of the 49 settlements, the SEC reported that it took into account the respondent’s self-reporting, cooperation, and/or remedial efforts as it set penalties and other remedies.

PCAOB Overview

In 2021, the Public Company Accounting Oversight Board (PCAOB) activity remained below pre-pandemic levels. The PCAOB publicly disclosed 18 enforcement actions involving auditing in 2021, a 38% increase from the 13 actions disclosed in 2020.¹ Of the 26 individual and firm respondents that settled with the PCAOB in 2021, monetary settlements were imposed on 18 (69%). These settlements totaled approximately $1.1 million.

SEC Actions Involving Accounting and Auditing Reached the Lowest Level in Recent Years

• The total number of accounting and auditing actions initiated by the SEC declined 32% from 50 in 2020 to 34 in 2021. This was a 41% decrease from the average number of 58 initiated actions during the 2016–2020 period and well below the number of actions initiated in each of the prior five years.

• The decline in the number of initiated accounting and auditing actions in the first year of the new administration (a decline of 16 actions, 32% lower than the number of actions in 2020) was smaller than the decline in the number of actions in 2017, the first year of the prior SEC administration (a decline of 31 actions, 42% lower than the number of actions in 2016).²

• For the first time since 2016, the SEC initiated all accounting and auditing enforcement actions in 2021 as administrative proceedings.

SEC Activity in the Early Months of Chair Gensler’s Administration Was at Higher Levels than in the Early Months of the Prior Administration

• On April 17, 2021, Gary Gensler was sworn in as Chair of the SEC.³ In June, Chair Gensler appointed Gurbir Grewal to serve as the Director of the SEC’s Enforcement Division.⁴

• Starting from mid-June, the enforcement activity under Chair Gensler progressed at a pace greater than the enforcement activity in the early months of the prior administration under then-Chair Jay Clayton.⁵

• In October 2021, Director Grewal publicly pledged to focus future SEC enforcement efforts on “restoring trust” in the financial markets, which includes recommending aggressive use of remedies that deter misconduct to protect investors and the marketplace.⁶

SEC Enforcement Activity Was Low throughout 2021

• The number of actions initiated in each quarter of 2021 was lower than the average number of actions initiated in each respective quarter from 2016 through 2020.

• For the second year in a row, enforcement activity in Q1 was particularly low. The SEC did not initiate any actions in March of 2020 or 2021.

• As in all but one of the prior five years, the third quarter of 2021 (the last quarter of the SEC’s fiscal year) had the highest number of accounting and auditing enforcement actions.

The Percentage of Non-U.S. Actions Initiated by the SEC Was Lower than Prior Years

• In 2021, the SEC initiated only three non-U.S. actions, the lowest number since 2015.

• The percentage of non-U.S. actions initiated by the SEC was lower in 2021 (9%) compared to 2020 (14%) and the 2016–2020 average (16%).

• Since 2016, the SEC has brought actions involving respondents in 20 countries outside the United States. The most non-U.S. actions were brought against respondents in Canada and the United Kingdom (five each).

The Percentage of SEC Actions Referring to Announced Restatements and/or Material Weaknesses in Internal Control Was Higher than in Prior Years

• Of the 34 SEC enforcement actions in 2021, 19 referred to announced restatements and five referred to announcements of material weaknesses in internal control.

• The percentage of 2021 SEC actions referring to announced restatements and/or material weaknesses in internal control (59%) was higher than the 2016–2020 average (38%).

• Of the 19 actions referring to restatements in 2021, only seven alleged improper revenue recognition (37%), a steep decline from the prior year when 15 actions that referred to a restatement also alleged improper revenue recognition (83%).

Revenue Recognition and Internal Accounting Control Violations Were the Most Common Allegations in 2021 SEC Actions

• The two most common allegations in 2021 SEC actions related to a company’s revenue recognition and violations of internal accounting control over financial reporting. Each of these violations was alleged in about one-third of the total actions.

• In 2021, the SEC initiated two actions under the new Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), which provides guidance for recognizing revenue for certain types of sales agreements.

• Eight actions involved issuers that sought additional time to file their Forms 10-K and 10-Q. In each action, the SEC alleged that the issuer failed to disclose (a) that a financial restatement or correction was among the principal reasons for the issuer’s late filing, and (b) that management anticipated significant changes in results of operations from the corresponding period for the prior fiscal year.⁷

• Only one action in 2021 was initiated as part of the SEC’s continuing Earnings Per Share (EPS) initiative. Instituted in 2020, the EPS initiative “utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.”⁸ In 2020, the SEC announced that the EPS initiative led to two actions.

• In a recent speech, Director Grewal suggested there is a “robust pipeline” of cases involving allegedly improper revenue recognition, earnings management, auditor independence, and deficient auditing.⁹ He also indicated that the EPS initiative continues to be a “source of many referrals” to the Enforcement Division.

SEC Actions Alleging Internal Accounting Control Violations Declined

• Although violation of internal accounting controls was one of the two most common allegations in actions initiated in 2021, at 32%, the percentage of these types of actions was lower than in recent years.

• As was the case in previous years, most of the 2021 actions alleging internal accounting control violations did not involve alleged violations of disclosure and control procedures.

SEC Actions Involved Fewer Respondents

• There were 46 total respondents in the actions initiated by the SEC in 2021, down 34% from 70 in 2020, and less than half of pre-pandemic levels.

• The SEC initiated more actions against individual respondents (26) than firm respondents (20) in 2021, consistent with prior years.

• The proportion of individual respondents (57%) in actions initiated in 2021 was higher than the 2016–2020 average.

The Majority of SEC Actions Involved SEC Registrants and Related Individuals

• The percentage of respondents in SEC actions involving SEC registrants and related individuals in 2021 (65%) was consistent with the 2016–2020 average (67%).

• The number of SEC actions involving auditor and audit firm respondents increased by 33% in 2021 to 16 from 12 actions in 2020.

• There were no actions involving auditors or audit firms of broker-dealers in 2021.

Total Monetary Settlements in Resolved SEC Actions Fell Sharply

• In addition to bars, suspensions, and other nonmonetary sanctions, the SEC imposed monetary settlements against 90% of respondents in 2021, but settlements totaled only $158 million.

• During 2021, the highest settlement against a firm was $62 million, well below the highest settlement in the prior two years.

• Total monetary settlements against individuals were approximately $7.0 million, $3.1 million higher than in 2020. The median settlement against individuals decreased from $75,000 in 2020 to $25,000 in 2021.

• Despite recent statements about the “need to revisit admissions” by Director Grewal,¹⁰ no resolved SEC actions in 2021 included admissions of wrongdoing.

• Director Grewal also suggested that, in reaching future settlements, the SEC may recommend increased penalties “when historical penalty amounts are not having the desired effect.”¹¹

Civil Penalties Comprised More than 60% of Total SEC Settlements

• For the 44 firm and individual respondents subject to monetary settlements in 2021, civil penalties accounted for approximately 62% of total monetary settlements, while disgorgement and prejudgment interest accounted for 31% and 6%, respectively.

• For the 19 firm respondents subject to monetary settlements in 2021, civil penalties accounted for approximately 64% of all monetary settlements.

• For the 25 individual respondents subject to monetary settlements in 2021, disgorgement accounted for approximately 63% of all monetary settlements. One action in 2021 accounted for the high proportion of total disgorgement.

• In 11 settlements with firm respondents, the SEC reported that it took into account the respondent’s self-reporting, cooperation, and/or remedial efforts as it set penalties and other remedies. These mitigating factors were applied to no individual respondents.¹²

PCAOB Enforcement Activity Increased but Remained below Pre-pandemic Levels

• As required by the Sarbanes-Oxley Act, the PCAOB keeps its investigations and disciplinary proceedings confidential and nonpublic until the matter is settled or otherwise finalized.¹³

• PCAOB enforcement actions increased 38% in 2021 compared to 2020. At 18, the number of PCAOB actions in 2021 was the second-lowest number of actions disclosed in the last six years.

• All but two of the settled actions in 2021 were instituted in the same year. One was instituted in 2019 and the other was instituted in 2020.

• In a recent speech, Patrick Bryan, the PCAOB Director of the Division of Enforcement and Investigations, indicated the Division had a “strong pipeline” and would “hit the ground running” in 2022.¹⁴

The Vast Majority of 2021 PCAOB Actions Were Finalized in Q3 2021

• The PCAOB finalized more than two-thirds of 2021 total actions in Q3. The 13 actions finalized in Q3 2021 equaled the total number of actions finalized in all of 2020.

• Nearly 40% of 2021 PCAOB actions involved alleged violations of the Engagement Quality Review (EQR) standard, down from nearly 70% of the actions in 2020.

• At seven, nearly two-thirds of the 11 actions involving firm respondents in 2021 contained allegations related to the firm’s system of quality control, consistent with 2020 levels.

• Director Bryan recently indicated a continued focus on audit firms’ systems of quality control and individual accountability.¹⁵

PCAOB Actions Involving Non-U.S. Respondents Increased in 2021 Despite Pandemic-Related Challenges

• The percentage of PCAOB actions involving non-U.S. respondents in 2021 (33%) returned to pre-pandemic levels and was comparable to the 2016–2019 average (31%).

• This was in spite of Director Bryan’s statement that 2021 was “a challenging year in terms of enforcement, with the continued work from home environment” and that “the ongoing effects of the pandemic, the inability to travel, certainly had an impact on some of [its] investigations, particularly oversees investigations where travel was really necessary for [the PCAOB] to advance those cases meaningfully.”¹⁶

• Since 2016, the PCAOB has brought actions involving respondents in 16 countries outside the United States. Brazil had the most actions brought against its auditors and audit firms during the 2016–2021 period (12).

More than 20% of PCAOB Actions Referred to Announced Restatements or Material Weaknesses in Internal Control

• The proportion of PCAOB actions in 2021 referring to announced restatements and/or material weaknesses in internal control (22%) was greater than the 2016–2020 average (19%).

• As in 2019, no PCAOB actions referred to both announced restatements and material weaknesses in internal control.

The Number of Unique PCAOB Actions Increased

• An individual PCAOB action may involve multiple respondents. At times, the PCAOB charges multiple respondents in separate actions, and identifies those actions as being related. Related actions may have been settled on different dates and/or included different allegations.

• Of the 18 PCAOB actions in 2021, two (11%) were identified by the PCAOB as being related to other action(s), slightly fewer than in prior years.

• In 2021, there were 16 unique PCAOB actions, a 60% increase from 2020 (10), but down 27% from the 2016–2020 average (22).

The Number of Respondents in 2021 PCAOB Actions Remained Significantly below Pre-pandemic Levels

• In 2021, the PCOAB finalized actions against 26 respondents, less than half of the pre-pandemic average of 53.

• The total number of respondents in 2021 PCAOB actions (26) decreased 4% from the number of respondents in 2020 (27) despite a 38% increase in the number of actions.

• In 2021, one-third of the actions involved a firm and no individuals, up from 8% in 2020 and 19% on average pre-pandemic.

• In addition to monetary settlements (discussed below), of the 11 firm respondents in 2021, three had their registrations revoked for one or more years. Of the 15 individual respondents in 2021, seven individuals were barred from practicing for a period of one or more years, and two individuals were suspended for a one-year period.

Total Monetary Settlements in 2021 PCAOB Actions Remained Low

• In addition to bars, suspensions, and other nonmonetary sanctions, the PCAOB imposed monetary settlements against 69% of respondents in 2021, similar to 2020 levels, and up from 60% in 2019.

• The PCAOB imposed monetary settlements against 91% of firm respondents in 2021, up from 78% in 2020.

• Monetary settlements against individuals totaled $115,000, which was less than two-thirds of settlements imposed against individuals in 2020. The median settlement decreased from $15,000 in 2020 to $13,000 in 2021.

• Monetary settlements against firms totaled $985,000 in 2021, down 24% from 2020 and 45% from 2019. The median settlement and average settlement against firms in 2021 ($23,000 and $90,000, respectively) were less than half the median settlement and average settlement in 2020.

• The PCAOB noted cooperation in three of its 2021 actions.

¹ As required by the Sarbanes-Oxley Act, the PCAOB keeps its investigations and disciplinary proceedings confidential and nonpublic until the matter is settled or otherwise finalized. See “Enforcement,” PCAOB website, https://pcaobus.org/Enforcement/Pages/default.aspx.

² Jay Clayton was sworn in as the SEC Chair on May 4, 2017. See “Jay Clayton Sworn in as Chairman of SEC,” U.S. Securities and Exchange Commission, May 4, 2017, https://www.sec.gov/news/press-release/2017-94. The SEC named Stephanie Avakian and Steven Peikin as Co-Directors of Enforcement on June 8, 2017. See “SEC Names Stephanie Avakian and Steven Peikin as Co-Directors of Enforcement,” U.S. Securities and Exchange Commission, June 8, 2017, https://www.sec.gov/news/press-release/2017-113.

³ “Gary Gensler Sworn in as Member of the SEC,” U.S. Securities and Exchange Commission, April 17, 2021.  https://www.sec.gov/news/press-release/2021-65.

⁴ “SEC Appoints New Jersey Attorney General Gurbir S. Grewal as Director of Enforcement,” U.S. Securities and Exchange Commission, June 29, 2021, https://www.sec.gov/news/press-release/2021-114.

⁵ Jay Clayton was sworn in as the SEC Chair on May 4, 2017. See “Jay Clayton Sworn in as Chairman of SEC,” U.S. Securities and Exchange Commission, May 4, 2017, https://www.sec.gov/news/press-release/2017-94. The SEC named Stephanie Avakian and Steven Peikin as Co-Directors of Enforcement on June 8, 2017. See “SEC Names Stephanie Avakian and Steven Peikin as Co-Directors of Enforcement,” U.S. Securities and Exchange Commission, June 8, 2017, https://www.sec.gov/news/press-release/2017-113.

⁶ Gurbir Grewal, Director, Division of Enforcement, “Remarks at SEC Speaks 2021,” Washington, DC, October 13, 2021, https://www.sec.gov/news/speech/grewal-sec-speaks-101321.

⁷ “SEC Charges Eight Companies for Failure to Disclose Complete Information on Form NT,” U.S. Securities and Exchange Commission, April 29, 2021, https://www.sec.gov/news/press-release/2021-76

⁸ “SEC Charges Companies, Former Executives as Part of Risk-Based Initiative,” U.S. Securities and Exchange Commission, September 28, 2020, https://www.sec.gov/news/press-release/2020-226.

⁹ For example, in a speech on December 8, 2021, Director Grewal stated, “You will see that we will have a firm commitment to moving forward, to continue to target deficient auditing by auditors, auditor independence cases, cases around earnings management, rev rec cases.  There is a robust pipeline, unfortunately, of these cases, and you will see some of these in the very near future.” See Gurbir Grewal, Director, Division of Enforcement, “SEC Enforcement Update,” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.

¹⁰ For example, in a speech on December 8, 2021, Director Grewal stated, “I really think we need to revisit admissions. I think in the right cases, we have to have wrongdoers step up in our cases, get away from the ‘neither admit or deny’, and admit their wrongdoing. That sends a powerful message in the right case.” See Gurbir Grewal, Director, Division of Enforcement, “SEC Enforcement Update,” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.

¹¹ Gurbir Grewal, Director, Division of Enforcement, “SEC Enforcement Update,” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.

¹² In a speech on March 9, 2021, Commissioner Caroline A. Crenshaw stated, “Cooperation provides companies with a potential path toward reducing or, perhaps, entirely avoiding penalties because it promotes and protects investors’ long-term interests. Issuers should take note that the Commission takes cooperation and self-reporting seriously. I want to make clear, however, that cooperation credit is not afforded to companies that merely respond to Enforcement Division requests, or to those that offer to conduct a not-so-independent investigation led by corporate counsel. Meaningful cooperation requires a commitment to proactively identifying and remediating wrongdoing, as well as holding accountable those individuals responsible for misconduct. It’s about substantially shortening the staff’s investigation and working with the staff toward an efficient resolution.” See Caroline A. Crenshaw, Commissioner, “Moving Forward Together – Enforcement for Everyone,” U.S. Securities and Exchange Commission, March 9, 2021, https://www.sec.gov/news/speech/crenshaw-moving-forward-together.

¹³ See “Enforcement,” PCAOB website, https://pcaobus.org/Enforcement/Pages/default.aspx.

¹⁴ In a speech on December 8, 2021, Director Bryan stated that Enforcement Staff “has worked very hard to develop a strong pipeline.” He further stated, “In terms of our position for enforcement in 2022, I think we are in a very strong position. Our teams have done a terrific job advancing cases in this environment. We anticipate making a number of recommendations early in the year. So I think 2022 will hit the ground running and certainly not have the slow start that we experienced this past year.” See Patrick Bryan, Director, Division of Enforcement and Investigations, “PCAOB Registration, Inspection, and Enforcement Updates” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.

¹⁵ In a speech on December 8, 2021, Director Bryan stated, “We have a continued focus on [quality control]. In fact in all of our priority areas, we are also looking at whether an audit deficiency, an audit violation, if there is a connection, a root cause to the firm’s system of quality control.” See Patrick Bryan, Director, Division of Enforcement and Investigations, “PCAOB Registration, Inspection, and Enforcement Updates” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.

¹⁶ In a speech on December 8, 2021, Director Bryan stated that 2021 was “a challenging year in terms of enforcement, with the continued work from home environment” and that “the ongoing effects of the pandemic, the inability to travel, certainly had an impact on some of our investigations, particularly oversees investigations where travel was really necessary for us to advance those cases meaningfully.” See Patrick Bryan, Director, Division of Enforcement and Investigations, “PCAOB Registration, Inspection, and Enforcement Updates” at the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, December 8, 2021.