SEC’s Focus on Auditors and Accounting Firms

The SEC has issued pronouncements on enforcement actions against auditing firms.  While the circumstances leading to enforcement actions seem unusual, SEC actions against auditors are nothing new and have occurred for decades.  As such, employees involved in audits should be aware of risk factors leading to regulatory discipline.

Audit enforcement actions generally fall into 2 categories:  (1) audit failures and (2) independence violations.  It’s important for auditors and auditees to be aware of several key issues here:

• Accounting scandals in the late 1990s and early 2000s led to the creation of the Public Company Accounting and Oversight Board (“PCAOB”) under the Sarbanes-Oxley Act of 2002.
• The SEC holds joint enforcement authority with the PCAOB over audit firms and accountants, which authority includes disciplinary actions related to practicing before the Commission; 
• The SEC views auditors as crucial gatekeepers in the financial markets, and therefore holds them to higher standards, and enforcement actions usually occur when these standards are not met;
• Regulators expect auditors to use professional skepticism and not unduly rely on management representations related to financial statement entries;
• Incompetence and close personal relationships can compromise independence or professional judgment; 
• Insufficient documentation by auditors is sometimes an audit failure; and 
• Valuation estimates, along with methodologies and assumptions, go to the heart of the financial statements, and auditors must obtain sufficient evidence to support these estimates.

Financial audits are often a year-round endeavor, so all organizations and individuals involved in audits must constantly be vigilant of conflicts of interests that may compromise an auditor’s independence and professional skepticism.   Good faith errors generally don’t result in liability, but expect the SEC to scrutinize those who conduct unreasonable audits or have compromised their independence.

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