Junaid A. Zubairi, Chair of Vedder Price’s Government Enforcement and Special Investigations group, served as co-chair of the 2019 ALI-CLE Accountants’ Liability program on October 17 and 18, 2019 in Washington, DC. The program was co-chaired by Veronica Callahan of Arnold & Porter Kaye Scholer LLP. In serving as co-chair of the program, Mr. Zubairi carries on Vedder Price’s long tradition in that role, which was previously held by John Eickemeyer, a Vedder Price shareholder and co-chair of the firm’s Accounting Law practice group, who founded the program and served as its co-chair for 30 years.

The theme for this year’s program was “Strategies for the Profession in an Era of Heightened Enforcement.” The program, which drew a record number of attendees, was headlined by keynote speakers Stephanie Avakian and Steven Peikin, Co-Directors of the Division of Enforcement of the United States Securities and Exchange Commission (SEC), and featured other speakers from the Division of Enforcement, the SEC’s Office of the Chief Accountant, the Public Company Accounting Oversight Board’s (PCAOB) Division of Enforcement and Investigations, and the PCAOB’s Division of Registration and Inspections. Accounting firms were also well represented, with speakers from Crowe, Deloitte, EisnerAmper, Ernst & Young, Grant Thornton, Mayer Hoffman McCann, and Weaver and Tidwell. The program’s faculty was rounded out with representatives from StoneTurn Group, Veris Consulting, and numerous national and international law firms with renowned accountants’ liability practices. In addition to serving as co-chair, Mr. Zubairi also participated as a member of the faculty along with Vedder Price shareholders Steven R. Berger and Michael J. Quinn.

In the keynote address, Ms. Avakian and Mr. Peikin reiterated their belief—previously espoused in the Division of Enforcement’s 2018 Annual Report—that annual enforcement statistics are not the only measure of the Division of Enforcement’s accomplishments. Moreover, the value of annual enforcement statistics is limited because, for example, cases are not brought based on a set calendar schedule, and a small number of outlier cases with large civil money penalties can skew annual aggregate penalty figures. Ms. Avakian and Mr. Peikin believe that a more meaningful way of assessing enforcement progress at the SEC is to focus on how resources are being allocated, whether the remedies in enforcement actions are effective, whether the Division of Enforcement is keeping up with technological advances and what the Division of Enforcement has been able to do to help “Main Street” investors. With these criteria in mind, the Co-Directors stated that they are deliberate when it comes to case selection, and that they intend for people reading an enforcement order to clearly understand why the SEC brought that particular case.

With respect to accountants and accounting firms, Ms. Avakian and Mr. Peikin noted that the integrity of financial statements is a core pillar of America’s capital markets system and that ensuring the integrity of accounting and audit work is a bedrock of the SEC’s mission. Areas of accounting-related emphasis for the SEC include financial statement fraud/disclosure, non-GAAP issues,¹ presentation of GAAP financials,² and failure to timely remediate material weaknesses in internal controls.³ Going forward, the SEC is focused on maximizing return of money to investors via a reorganized distribution program and shortening the time it takes to move high-priority cases to completion. The latter effort will involve more narrowly targeted subpoenas, investigating issuers/registrants and their audit firms simultaneously, and engaging earlier and more significantly with the issuers/registrants, their legal counsel and, where appropriate, their auditors, to more quickly understand issues as they come to light.

In addition to the keynote address, the program also included panel discussions regarding litigation and regulatory enforcement trends and strategies, auditor independence, key GAAP and GAAS issues, and strategic considerations when dealing with a whistleblower and/or government investigation. Other panel topics included international challenges faced by accounting firms with a global presence; strategies for defending clients in SEC administrative proceedings; PCAOB inspection trends, strategies and enforcement developments; new FASB standards; and emerging areas such as cannabis, cryptocurrency and cybersecurity.

Key takeaways from these panel discussions include the following:

• The PCAOB is looking to update inspection reports to make them more useful.
• The PCAOB is using target teams of inspectors to focus on specific topics across firms, which helps to identify topics of focus for future inspections.
• For accounting firms providing services to cannabis companies, robust due diligence (e.g., background investigations on a cannabis company’s management, developing a complete understanding of the company’s business, understanding who the company’s stakeholders and investors are, etc.) is imperative before entering into an engagement.
• The SEC has amended its application of auditor independence rules to lending relationships, replacing the 10 percent bright-line test with a “significant influence” test.
• The SEC is aware of the United States District Court for the Southern District of New York’s May 2, 2019 ruling in U.S. v. Connolly regarding government “outsourcing” of investigation work to an investigated entity’s outside counsel, but it believes this ruling is based on unique facts and thus is unlikely to have a significant impact on how the SEC handles its investigations of cooperating entities.
• Remedial actions taken by an entity under investigation are a key consideration in the SEC’s determination of whether to impose an independent compliance consultant. The SEC considers the timing of remedial actions, and it views proactive remediation taken in advance of settlement discussions more favorably than remediation implemented as part of the process of settling with the SEC. Among other benefits, early remediation provides sufficient time to test newly implemented controls and to convince the SEC that the remedial efforts will reasonably prevent a recurrence of the misconduct at issue.
• The SEC continues to emphasize the importance of self-reporting and cooperation, as evidenced by the recent PPG Industries, Inc. case.⁴ In that matter, the SEC charged an issuer with, inter alia, violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder stemming from misstated financial statements. Despite the fraud charges, the SEC did not assess a penalty in light of PPG’s self-reporting, cooperation and proactive remedial actions.
• While the appointment-related aspects of Lucia v. SEC (i.e., that the SEC’s administrative law judges are “officers” who must be appointed pursuant to the U.S. Constitution) have been addressed by the SEC, there are lingering questions about whether SEC administrative law judges are unconstitutionally protected from removal.
• The PCAOB is looking to make greater use of technology in identifying and conducting investigations, including advanced document review and analysis tools that will identify key documents and issues earlier.

If you have any questions about the content of this year’s program, or about registering for next year’s program in October 2020, please contact a Vedder Price attorney.

^{1 In the Matter of FCA US LLC and Fiat Chrysler Autos. N.V., Admin Proc. File No. 3-10541 (Sept. 27, 2019).} 

^{2 In the Matter of Brixmoor Prop. Grp., Inc., Admin. Proc. File No. 3-19300 (Aug. 1, 2019).}

^{3 In the Matter of Grupo Simec S.A.B de C.V., Admin. Proc. File No. 3-18972 (Jan. 29, 2019); In the Matter of Lifeway Foods Inc., Admin. Proc. File No. 3-18970 (Jan. 29, 2019); In the Matter of Digit. Turbine Inc., Admin. Proc. File No. 3}

^{18971 (Jan. 29, 2019); In the Matter of CytoDyn Inc., Admin. Proc. File No. 3-18969 (Jan. 29, 2019).}

^{4 In the Matter of PPG Indust., Inc., Admin. Proc. File No. 3-19532 (Sept. 26, 2019).}