Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

Good morning. I’m going to focus today on the importance of a robust enforcement program; as well as share some of the themes I’ve observed in working to achieve that robust program by supporting our partners in the Division of Enforcement.

The Commission’s Enforcement Program and the Accounting Profession

In my work in OCA, I often find myself looking at situations where something has gone wrong (e.g. a fraud, a restatement, an audit failure). An unfortunate consequence of always looking at issues where something went wrong is that it’s easy to forget all the hard work that folks like you do every day to make sure you’re getting to the right answer.

When I do think about all the professionals who are doing the right thing, I’m reminded of how important it is to hold those who are not meeting the profession’s high standards accountable. Tremendous effort and thought goes into figuring out what the right standards should be (be they accounting standards, auditing standards, or Commission Rules). Ensuring a level playing field is so important, not only for investor protection, which will always be paramount, but also as a means of demonstrating the high standards the profession has set for itself.

One of the main tools the Commission has to enforce these high standards is through Rule 102(e) to suspend accountants from appearing and practicing before it. OCA has been, and will continue to be, an active participant with the Division of Enforcement in recommending enforcement actions where preparers, auditors, and accounting firms have demonstrated that they are a threat to the Commission’s processes.

Having said that, I understand why at gatherings like this, it’s not an easy topic. And that’s fair. But I assure you, OCA staff does not take the responsibility of our role in the Commission’s Rule 102(e) program lightly, and we never forget our mission, the impact on people’s careers, and that accounting is hard. But in my experience, neither the Division of Enforcement, nor the Office of the Chief Accountant is in the business of second-guessing professional judgments made in good faith. But just as the profession needs a strong voice on interpretive issues, it also needs a regulator able to call out behavior that threatens the Commission’s processes that protect investors.

Taking time to reflect on past enforcement cases is not an opportunity to wag a finger at the profession, but rather it’s an opportunity to talk about lessons learned and to help those who are doing their jobs and meeting high standards so that they (and their teams) might better identify how things can move sideways. So today, I’d like to describe some general themes I’ve seen over the years.

Individual Accountability and Responsibility

In a majority of the cases I’ve worked on, there’s someone involved who recognized at some point that what they were involved with didn’t feel quite right or make sense. Perhaps they couldn’t figure out why that complex financial instrument no one had done the necessary work to understand had been steadily marked up in value over the years. Perhaps someone got a funny feeling about a series of transactions entered into before the quarter end. Most professionals have these feelings from time to time. And in many cases there are reasonable explanations to allay those feelings.

However, burying your head in the sand, not doing the work needed, and hoping for the best is not an effective strategy in life or accounting. I get the sense in many of the cases I work on that people involved wished they had done the work, said something to raise an issue – or if they did raise an issue, that they had done so earlier. And you might rightfully think that’s obvious, but I don’t think that sentiment is limited to situations where someone could have stopped a massive fraud. Raising an issue and running it to ground, including documenting a conclusion, not only may prevent investor harm, but alternatively it might prevent a minor issue from becoming a major one (e.g. explaining yourself to the Division of Enforcement).

Relatedly, a common theme I’ve seen is professionals, both individually and collectively, who do the exact right thing, right up until they don’t. Situations where auditors have robust procedures that identify issues and elevate them appropriately, but then bow to client pressure or accept explanations that don’t make sense. Situations where controllers know about process breakdowns and what the solution is, but don’t raise an alarm at the risk of a late filing. Or perhaps a situation where an issuer has created a robust valuation model, with thoroughly researched and supportable inputs, only to have a last-minute unsupported tweak.

In all these examples, a lack of follow-through can negate the good work that was done preparing the financial information for investors.

And in my experience, people often fall into the trap of thinking someone else will address larger problems. When it gets to the point where we and the Division of Enforcement are involved, there’s often a great deal of finger-pointing and blame shifting. And sometimes reasonable explanations about differing responsibilities can be made. But few would argue with the idea that, had some party to the matter stepped up and taken more responsibility for resolving an issue, investors could have avoided harm, or at the very least, the company could have avoided the cost and effort of addressing other significant consequences (including responding to an enforcement investigation).

Clear lines of responsibility and an environment where professionals are encouraged to identify and attempt to resolve issues fit well with my final point, which is on the importance of internal controls. The best defense against bad actors, costly errors, or harming one’s professional career, is a robust system of internal accounting controls, both by design and through effective operation. We always consider the internal accounting control environment when evaluating enforcement matters.

In closing, I’d encourage you to listen closely to our colleagues from the Division of Enforcement when they speak tomorrow and know that we’re all rooting for your success in providing the high quality financial reporting that investors rightly deserve and demand. Thank you for your time.