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Determinants of the Severity of Legal and Employment Consequences for CPAs Named in SEC Accounting and Auditing Enforcement Releases

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Abstract

This study investigates the impact of Securities and Exchange Commission (SEC) enforcement actions on individuals holding Certified Public Accountant (CPA) accreditation. While prior research has investigated both the characteristics of companies that have been investigated by the SEC and litigation against audit firms, it has not addressed the ways in which SEC investigations impact CPAs. Using a sample of 262 CPAs, we find that the most common CPA breach was associated with overstating revenues/income or earnings. The study finds serious consequences for CPAs in terms of employment restrictions and SEC actions, incorporating suspension, which is often permanent. We find that the primary factors relating to the severity of actions by the SEC is whether the CPA intentionally breached the professional code of conduct, the age of the CPA, whether the CPA is still a member of the AICPA with CPA status and whether the CPA was operating as an external auditor or in a corporate accounting role. Our findings have implications for accounting practitioners, the AICPA and boards of directors.

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Notes

  1. Most frequently cited violations include breaches of Section 17(a) of the Securities Act of 1933 which prohibits fraud in the offer or sale of securities, Section 13(a) of the Securities Exchange Act of 1934, which requires issuers of registered securities to keep their registration statements accurate; and file annual and quarterly reports with the Commission, and Section 10(b) of the Securities Exchange Act of 1934, which prohibits a person from making untrue material statements or “omitting a material fact necessary to keep statements from being misleading” in connection with the sale (or purchase) of securities. Violations of Section 13(b)(2)(A) of the Securities Exchange Act of 1934, which is a failure of a required entity to file reports, to maintain and keep books, records and accounts, which are reasonably detailed and fairly reflect transactions and economic event is also a common charge. Firms that are registered issuers on the stock exchange must devise and maintain an adequate system of internal accounting controls, as required under Section 13(b)(2)(B) of the Securities Exchange Act of 1934. Under Section 13(b)(5) of the Securities Exchange Act of 1934, individuals are prohibited from knowingly circumventing or failing to implement a system of internal accounting controls or falsifying any book, record or account. CPAs who breach these sections of the Securities Exchange Act of 1934 are often subject to an AAER.

  2. The COSO Report has since been updated, and was republished in 2010 (see COSO 2010).

  3. Bealing (1994) and Bealing et al. (1996) focus on the early regulatory development of the SEC and its funding patterns in establishing its legitimacy, however, the authors do not consider specific instances of enforcement activities or the determinants of the severity of such actions.

  4. Data only become available on the SEC website a number of years after the action is completed. That coupled with our desire to investigate the extent to which CPAs subject to suspension are later reinstated has influenced the time lag in our study.

  5. In sensitivity testing, we use an additional measure of the SEC outcome—SECSUSPEND—measured as a dichotomous variable as follows: 1 = suspended from practicing before the SEC, 0 = not suspended.

  6. There were no suspension orders made which were greater than 7 years but where the CPA was not permanently suspended.

  7. In the case of auditors, job termination refers to whether the individual was retained by the audit firm.

  8. In sensitivity testing, we replace this with age brackets measured on an ordinal scale: 1 = less than 30, 2 = 30–39, 3 = 40–49, 4 = 50–59, 5 = 60–69, 6 = 70 and over.

  9. The total sample was 262 but we were only able to obtain age data for 242 subjects. This information was not always disclosed in the AAERs or available from the state registers of CPAs.

  10. A rule of thumb is that if the correlation coefficients between two regressors is in excess of 0.8, then multicollinearity is a serious problem (Gujarati 1995).

  11. It should be noted that a limitation of this paper is that we do not have details on whether the CPA chose to relinquish their CPA status, or if the State Boards took action to remove this designation.

  12. We also conducted additional analysis on the sub-sample of auditors; however, the models were not significant. While prior research at the audit firm-level finds the incidence of AAERs to be a function of the extent to which financial statements contain a fraud that is commonly occurring, or where they involve fictitious transactions or events (Bonner et al. 1998), it does not appear that action against individual auditors is as prevalent, nor can it be explained by our predicted determinants.

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Authors and Affiliations

  1. School of Accounting, RMIT University, Melbourne, Australia

    Daniella Juric & Brendan O’Connell

  2. Department of Accounting, Monash University, Melbourne, Australia

    Michaela Rankin

  3. UQ Business School, University of Queensland, Brisbane, Australia

    Jacqueline Birt

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  1. Daniella Juric
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Correspondence to Brendan O’Connell.

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Juric, D., O’Connell, B., Rankin, M. et al. Determinants of the Severity of Legal and Employment Consequences for CPAs Named in SEC Accounting and Auditing Enforcement Releases. J Bus Ethics 147, 545–563 (2018). https://doi.org/10.1007/s10551-015-2956-y

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