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PROFESSIONAL LIABILITY SPOTLIGHT

Lessons for every CPA firm

from public audit

By Nicole L. Graham, Esq.

ecent enforcement efforts from the SEC and Service-specific
Record- Rthe PCAOB indicate regulators are ramping
setting up their efforts to hold accountable firms that quality control
enforcement fail to follow professional standards. Let’s review
$6.4 maintaining proper internal controls can help keep protocols should be
enforcement trends from 2022 and discuss how
your firm out of the crosshairs of regulators and/or
billion claims by clients in 2023. included in the firm’s
Even if your practice does not include audits
Amount the of public companies — or even audit services — written policies and
SEC issued in review and continuous monitoring of your internal procedures.
penalties in 2022, controls are still useful risk management practices.
the highest in its Such actions create an environment where staff
history. know what is expected of them in terms of service
quality and are comfortable escalating problems or violations were significant both in terms of mon-
Source: “SEC Announces concerns from the start to seek support for a resolu- etary penalties and required remedial measures.
Enforcement Results for tion process. Delay and avoidance may also result in
FY22,” SEC news release, increased regulatory penalties or large-dollar claim LESSONS LEARNED AND RISK MITIGATION
Nov. 15, 2022.
awards when eventually brought to light. PRACTICES TO ADOPT
In 2022, the SEC filed 760 enforcement actions, Systemic failure of internal controls and/or quality
a 9% increase from 2021, and the PCAOB imposed control protocols allows noncompliance with rules
the highest total penalties in its history, more than and standards to start and to continue unabated.
quadrupling the total dollar amount of penalties Though errors and missteps can and will happen,
imposed against firms. Both the SEC and PCAOB how your firm responds when issues arise is im-
have signaled they intend to continue to aggres- portant. You need to have procedures in place that
sively pursue enforcement efforts in 2023. PCAOB will uncover the issue and set forth protocols for
Chair Erica Y. Williams has stressed that the board is resolving the problem. Regardless of practice area,
approaching enforcement with renewed vigilance. every firm should have a risk management program
SEC Chair Gary Gensler has also expressed in place that includes internal control protocols and
that the SEC’s crackdown is just getting started written quality control practices and procedures,
and that it would continue to pursue violations and encourages regular communication with and
wherever and however they occur. As evidenced by training for employees for identifying, managing,
some of the penalties imposed against CPA firms and escalating potential risk areas.
in 2022, these are not hollow threats. How errors or mistakes are handled by the firm
In 2022, the SEC’s and PCAOB’s enforcement can affect the fallout, including penalties from regu-
actions appeared more punitive in nature — if lators or claims/lawsuits by clients. For example, if
firms exhibited systemic issues, the penalties an associate in the tax practice incorrectly applies
against the firms and/or the individuals involved a rule or regulation that causes a client to pay
were harsher, ostensibly to serve as a deterrent to more tax than what is owed, such an event may be
continued violations. Violations involving a failure relatively easy to address, and the potential damages
or lack of internal controls, including instances may be easily quantified and/or mitigated. However,
where firm culture or firm management either if the tax associate is not properly trained and/or
failed to recognize or permitted the violations to supervised and makes the same mistake on multiple
continue over a period of time, seemed to draw returns over several years, the potential damages
the ire of the agencies. The penalties for such and possible penalties increase exponentially.

4 | Journal of Accountancy March 2023