PCAOB on pace for record year of financial penalties

The Public Company Accounting Oversight Board is on pace for a record-setting year for civil monetary penalties. Through July 31, 2022, the PCAOB has levied penalties against registered accounting firms and individuals totaling $1.36 million. While this figure does not appear significant in comparison to other regulatory agencies’ reporting metrics, it is significant for the PCAOB, which has signaled it is ramping up financial penalties in enforcement settlements. At this rate, 2022 penalties will eclipse annual penalties levied in 2019, 2020 and 2021.

In a July 28, 2022 speech to the Council of Institutional Investors, PCAOB Chair Erica Williams stated that strengthening the PCAOB enforcement activity is one of the board’s three key focus areas. She noted the board has “more than doubled [its] average penalties against individuals compared to the last five years” and that the board has “increased [its] average penalties against firms by more than 65%.” She also indicated that all 2022 settled cases have included financial penalties. 

Financial penalties are only one of many sanctions available to the board. The board can prohibit a registered firm from accepting PCAOB engagements, require the firm to undertake certain remedial actions, temporarily suspend or permanently bar individuals from working on or holding certain roles on issuer engagements, and requiring individuals to take relevant continuing professional education. Revoking a firm’s registration is the most severe non-financial penalty the board can impose as it permanently eliminates a firm’s revenue stream from issuer engagements. 

Historically, financial penalties on firms and individuals ranged from significant to a mere slap on the wrist and varied with the significance of the wrongdoing. An analysis of financial penalties from 2019 to the present indicates that, when levied at all, penalties were as low as $2,500. When imposing financial penalties, the board considers the nature of the firm and its operations. For the purpose of this analysis, firms not affiliated with international networks (both domestic and international), “non-affiliated firms,” were segregated from those affiliated with large, multinational firms or those inspected annually, “affiliated firms.” The following table summarizes financial penalties against these firms or individuals associated with them between Jan. 1, 2019 and July 31, 2022.

Note: For the six instances in the data included above in which a single fine was attributed to both a non-affiliated firm and an individual within that firm, the table divides the fee equally between the firm and the individual.

At the current rate, 2022 financial penalties are projected to be $2.3 million, almost the value of fines from 2021 and 2020 combined. 

Fines for affiliated Firms and individuals associated with those firms are consistently greater than those from non-affiliated firms and their personnel. This is likely due to the profiles of affiliated firms: They have more resources; audit a significantly higher level of market capitalization; and garner greater attention to serve as a deterrent than do non-affiliated firms. 

The increase in financial penalties is likely due to the change in the composition of the PCAOB board that took place in late 2021 under the Biden administration. With the exception of Duane DesParte, who became a board member in April 2018, board members were appointed in November 2021. In her comments to the Council of Institutional Investors, Chair Williams stated she was “an enforcement lawyer at heart.”

The PCAOB has been criticized for doling out paltry penalties. An analysis published by the Project On Government Oversight in September 2019 indicated only $6.5 million in fines were levied against the Big Four accounting firms during the PCAOB’s first 16 years. POGO also found individuals at U.S Big Four firms were fined only $410,000 during that same period — a sum POGO indicated was less than a single partner’s annual earnings at a Big Four firm. 

Compared to its counterpart in the United Kingdom, even the increased financial penalties in 2022 are nominal. On July 28, 2022, the Financial Reporting Council published an enforcement review disclosing record financial sanctions of £46.5 million over the last year. 

Under PCAOB Rule 5303, all monetary penalties are used to fund merit scholarships for accounting students and are not used to fund the PCAOB’s operations. On July 14, 2022, the board announced the names of 250 accounting students selected for $10,000 scholarships for the upcoming academic year. 

Given the PCAOB’s increased focus on enforcement activity, Chairman Williams’ enforcement background and external pressure to have financial penalties serve as a more meaningful deterrent, the upward trend in financial penalties should not be slowing anytime soon.