On June 9-10, 2022, Arnold & Porter co-sponsored and co-chaired the American Law Institute Accountants Liability Conference in Washington, DC. The event kicked off with Arnold & Porter partner Paul Fishman sitting down for a “fireside” chat with SEC Chief Enforcement Officer Gurbir Grewal and Acting Chief Accountant Paul Munter to discuss the emerging issues related to the liability of accountants. The conference also featured discussions with PCAOB Director of the Registration and Inspections Division, George Botic, and a faculty comprised of senior government officials, general counsel from international corporations, and seasoned outside attorneys and forensic experts. Here are some high-level takeaways from the conference.

Comments from SEC Chief Enforcement Officer Grewal and Acting Chief Accountant Munter. Echoing a statement issued a day before the conference, Acting Chief Accountant Munter and Director Grewal stressed the importance of auditor independence under Rule 2-01(b) of Regulation SX. Rule 2-01(b) requires auditors to be independent in fact and appearance, measured by “a reasonable investor having knowledge of all relevant facts and circumstances”. The rule also includes a non-exhaustive list of circumstances (paragraphs (c)(1) through (c)(5)) that the Commission finds inconsistent with the independence requirements. Acting Chief Accountant Munter, however, cautioned auditing firms and issuers against viewing Rule 2-01 and auditor independence with a checklist mentality. The circumstances listed in Rule 2-01(c) are necessary but not sufficient to ensure auditor independence under Rule 2-01(b).

Director Grewal and Chief Accountant Munter also reaffirmed the Commission’s intention to prosecute audit firms and issuers for accounting irregularities. In a recent settlement, the Commission charged an auditing firm and three of the firm’s partners with improper professional conduct regarding two clients, fined the firm $1.9 million, and imposed prohibitions on two partners while by censoring the associate of the national office. The SEC cited the firm’s flawed quality control system and repeated failures to exercise due professional care at all levels, from the engagement team to the firm’s national office, not only authorized but source of customer disclosure violations. Director Grewal and Chief Accountant Munter echoed the comments of Melissa Hodgman, Associate Director of the Enforcement Division, when the settlement was announced: “Auditors are essential gatekeepers who must use a robust system of quality control to ensure faithful adherence to professional standards. In another recent settlement, this time with Synchronoss, the SEC used all available sanctions and remedies to recoup $1.3 million in profits and bonuses from the sale of stock from the company’s founder and former CEO. , although no charges of misconduct are brought against him. In a press release addressing the issue, Director Grewal said the Synchronoss case should “warn public company executives that even where they are not accused of having played a role in the misconduct at issue, we will always pursue the recovery of the compensation”.

Finally, Director Grewal and Chief Accountant Munter expressed concern about the technological and regulatory risks presented by digital assets. The Commission has issued guidance, Staff Accounting Bulletin No. 121, on accounting for the protection obligations of crypto-assets that an entity holds for users of its platform. The Commission issued SAB No. 121 because digital assets present unique legal issues that do not exist in other custodial relationships. And for Acting Chief Accountant Munter, these types of risks manifest themselves in an accounting liability that should be on the balance sheet and measured at the fair value of the protected digital asset. Given the difficulty of identifying a digital asset, the Corporate Finance Division and the SEC’s Strategic Center for Innovation and Financial Technology are offering consultations to determine whether assets held by trading platforms are considered digital assets. The Commission intends to ensure that all digital offerings, products and platforms fall under the jurisdiction of the SEC and follow the agency’s rules.

SEC Law Enforcement Priorities and Trends According to SEC Staff. When responding to an SEC request or subpoena, SEC staff recommends responding promptly and completely so that a decision can be made effectively. It is a guiding principle of the Commission to build public confidence in financial institutions, regulators and markets by moving business forward quickly. The SEC may tailor remedies, such as imposing a lesser penalty or no penalty at all, as a result of a company’s cooperation or remediation throughout the investigative process. Staff clarified, however, that cooperation does not simply mean complying with a subpoena. Instead, the cooperation may include self-reporting working papers that might otherwise be difficult for the SEC to detect, providing analysis to the SEC that would otherwise be time-consuming for the agency to conduct, or providing documents outside the scope or date range of a subpoena. relevant to an investigation.

The staff also recommends taking corrective action throughout the SEC investigation process. A company’s ability to isolate and fix a problem can reduce an SEC penalty. Also, updating or revising a company’s policies, procedures or controls is not a form of admission, according to staff. However, slowing down or preventing an SEC investigation will deter staff from keeping an open mind or applying cooperation or remediation credit to an audit firm’s sanction. According to Director Grewal, staff saw defense attorneys slow down the investigative process by framing witnesses, threatening SEC attorneys, slowing document production and improperly invoking privilege.

The PCAOB Inspection Program. In 2022, the PCAOB’s inspection focus remains COVID-19. The PCAOB examines how audit firms are dealing with a hybrid workforce, rising costs and inflation, the Great Resignation, and SPAC and De-SPAC transactions. In addition, the PCAOB has deployed a ten-person team to conduct “targeted inspections” on emerging issues, such as the C-suite’s carbon neutral commitments and delivery centers of excellence. Targeted inspections are random and follow a risk-based selection approach. In May, the Office of the Chief Auditor released an updated standards program, including short- and medium-term projects related to quality control, attestation standards and fraud.

Conclusion

The enforcement priorities of the SEC and the PCAOB are rapidly changing in response to emerging issues within the audit profession in the United States. These priorities point to a period of heightened compliance enforcement for issuers and companies. Market participants should take note of the change in approach, including external messages related to auditor independence, cooperation and remediation credits, and crypto-assets, and take proactive steps to ensure compliance with federal securities laws.

Arnold & Porter continues to monitor and report key law enforcement and regulatory developments to the SEC and PCAOB. In the meantime, please contact one of the authors of this review or your usual Arnold & Porter contact with any questions.

*Trevor Kirby contributed to this review.

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