Constitutional challenges hindered SEC and PCAOB enforcement in 2024
The most recent report from The Brattle Group has brought to light how constitutional challenges played a crucial role in influencing the enforcement actions of both the Public Company Accounting Oversight Board (PCAOB) and the US Securities and Exchange Commission (SEC) concerning auditors throughout 2024.
While there was a noticeable increase in combined enforcement actions by these regulatory bodies, legal hurdles slowed down the pace of these actions in the latter half of the year. The report, titled “2024 Enforcement Activity Involving Auditors: SEC & PCAOB Enforcement Actions Brought Against Public Accounting Firms and Individuals,” was authored by Alison Forman and Adam Karageorge.
This report comprehensively compares the data from 2024 with that of 2022, 2023, and 2018-2021, emphasizing the heightened level of activity during the leadership tenure of PCAOB chair Erica Williams and SEC chair Gary Gensler. Moreover, it delves into the enforcement trends observed in the years 2018-2021 under previous administrations.
One of the critical aspects highlighted in the report is the SEC v. Jarkesy decision, which had a significant impact on the SEC’s enforcement approach. This ruling deemed the use of administrative proceedings by the SEC to impose civil penalties for securities fraud as unconstitutional, leading to a noteworthy drop in auditor-related actions initiated by the SEC in 2024, with a 50% decline compared to 2023.
In contrast, the PCAOB took the lead in initiating 88% of total actions against auditors in 2024, reaching the highest level of enforcement since 2017. Jointly, the PCAOB and SEC imposed $52.2m in monetary sanctions, a remarkable 66% surge from 2023 and over two and a half times the average of 2018-2021. Notably, the PCAOB’s penalties in 2024 totaled $35.7m, surpassing the previous administration’s annual average by more than 23 times.
Following the Jarkesy ruling in late June 2024, a significant impact on enforcement activities was witnessed, with only one-third of PCAOB actions and 2% of penalties being imposed. The ruling itself reinforced the Seventh Amendment’s right to a jury trial for civil monetary penalties in securities fraud cases.
Alison Forman commented on the situation by pointing out that while enforcement actions by the PCAOB and SEC against auditors remained substantial in 2024, the aggregate statistics fail to capture the full story. The impact of the Supreme Court’s SEC vs. Jarkesy ruling and similar challenges faced by the PCAOB and the new presidential administration are expected to bring about a significant shift in the enforcement landscape in the future.
The report also forecasts the enforcement landscape for auditors in 2025 and beyond, anticipating further changes due to the constitutional challenges encountered by these regulatory bodies.