The Public Company Accounting Oversight Board (PCAOB) announced on 16 April that it reached an agreement with the Auditors’ Public Oversight Authority (APOA) of Hungary “for the oversight of audit firms subject to the regulatory jurisdictions of both regulators.” The cooperative agreement provides for joint inspections by PCAOB and APOA, as well as data protection measures during such inspections. The agreement will take effect immediately.

The PCAOB’s goal, according to its Chairman, James R.  Doty, is to “further strengthen PCAOB’s cooperative arrangements in Europe….” Indeed, the PCAOB has entered into similar agreements with the relevant regulators in Denmark, Sweden, Finland, France, Germany, the Netherlands, Spain, and the United Kingdom.

2014 sees rise in accounting-related class action suits

A review of high-profile litigation in 2014 reveals that class actions against accounting firms are up since last year.

According to an April study by PricewaterhouseCoopers (PwC), accountants faced an increase in federal class actions suits last year. Indeed, “[w]ith financial crisis- related litigation largely played out, accounting-driven federal securities class actions are on the rise — both in total number of cases (53, up from 46) and as a percentage of all cases filed (31%, up from 29%).” Nearly  40 percent of the accounting-related suits “included allegations of improper revenue recognition.” The PwC report also identifies several “emerging issues” for  auditors in 2015: “heightened enforcement of anti- corruption statutes, the rise in cyber-breaches, and new complexities in financial markets.” 

Another April study conducted by Cornerstone Research similarly reported that “allegations of accounting fraud surged 47 percent in securities class-action lawsuits last year over 2013.” Accounting settlements dwarfed non- accounting settlements in 2014: US$907.8 million in accounting settlements compared to US$160.2 million in non-accounting settlements. With “overall securities class-action suits remain[ing] almost the same,” the increase in accounting-related cases indicates that there is an increased focus on accounting fraud.

SEC sheds some light on use of in-house judges

The Securities and Exchange Commission (SEC or the Commission) recently issued public statements about its preference for administrative hearings over federal court proceedings.

SEC Chair Mary Jo White testified before members of Congress on 5 May and addressed concerns about the Commission’s use of appointed administrative judges. She declared that “the appearance of fairness is important,” and told a U.S. Senate appropriations panel that she was considering whether the Commission should implement public guidelines to make its forum-selection process more clear and transparent. As the Wall Street Journal reported in October, the Commission had a 100 percent  success rate in front of its appointed administrative judges in 2013-2014, compared to only a 61 percent success rate in federal court. The Journal released updated numbers in May which indicate that the Commission’s success rate in administrative hearings was 90 percent from October 2010 through March 2015, compared to only a 69 percent success rate in federal court over the same period.

The SEC’s practice of using administrative courts has even raised issues of constitutionality. The U.S. Court of Appeals for the District of Columbia Circuit heard a case  last month in which the use of administrative courts by the SEC was challenged as violating the equal-protection and due-process requirements of the Constitution. Lower courts have previously denied similar requests on procedural grounds.

Soon after Mary Jo White’s testimony, the SEC released  guidance on 8 May enumerating the factors the Commission considers in choosing the appropriate tribunal for prosecution. Among the relevant factors are: the availability of claims, legal arguments, and forms of relief in each forum; whether any charged party is a registered entity or is associated with a registered entity; the time and cost of litigation in each forum; and “[f]air, consistent, and effective resolution of securities law issues and matters.” According to the guidance, when deciding where to prosecute, “the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission.”

Given that the new SEC guidance only vaguely outlines its internal procedures, many practitioners continue to call for more transparency.