SEC Racks Up Record $6.4 Billion in Enforcements, Warns of Rising Fraud Risk

The U.S. Securities and Exchange Commission (SEC) obtained a record $6.4 billion in enforcement actions in the last fiscal year, according to the agency's chair Gary Gensler. Meanwhile, the SEC’s acting chief accountant cautioned that recession fears and the current market sell-off may increase the risk of accounting fraud.

Gensler announced the total penalties on November 4, during a speech at a Practicing Law Institute event. The Wall Street regulator levied the record sum in the 12 months ending September 30 through roughly 700 enforcement actions. The number of cases is comparable to previous years, but the total levied dwarfs the $3.9 billion obtained the year before and beats the 2020 record of $4.7 billion.

Commentators note that the surging total penalties underscore the SEC’s recent tendency to impose larger monetary sanctions. This is seen as a part of a broader push by the current administration to increase regulatory scrutiny. As we reported back in January, the federal government is working on several fronts to adopt a tougher stance on corporate misconduct.?

The Wall Street Journal (WSJ) cited Gurbir Grewal, SEC’s enforcement director appointed last year, who explained that the goal of the harsher fines is to “deter and reduce securities violations,” adding that penalties should not be seen as an “acceptable cost of doing business.” This echoes the sentiment recently expressed by the U.S. Department of Justice, which is also adopting more stringent penalties for corporate offenders – a move we covered in October.

The sanctions SEC levied in the last year include a civil fine for Germany's Allianz SE amounting to $675 million – one of the largest penalties the agency has imposed since the collapse of Enron Corp and WorldCom Inc nearly two decades ago. In May, one of the financial firm’s U.S. subsidiaries pleaded guilty to criminal securities fraud over the tanking of several investment funds at the beginning of the COVID-19 pandemic.

Other major SEC actions in the past year include penalties against 16 Wall Street companies. In September, the regulator imposed a combined fine of $1.8 billion on financial firms including Barclays, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley for failing to keep track of employees who used personal phones and apps to discuss deals and trades.

The SEC recently raised the alarm about a potential increase in fraud risk due to the precarious economic situation, which, the regulator says, creates an incentive for firms to misreport their finances.

“The current economic environment is subject to significant uncertainties and, historically, that oftentimes leads to heightened fraud risk,” said Paul Munter, acting chief accountant at the SEC, in a WSJ interview. “So we are trying to be proactive and speak to the marketplace.”

The commission has also been turning up the heat on auditors in recent months, suggesting they are not doing enough to detect fraud. In a statement, Munter called out independent auditors for failing to fulfill their role as “gatekeepers” in the protection of investors.?

At the same time, the Public Company Accounting Oversight Board (PCAOB) – the audit regulator which is part of the SEC, has begun ramping up enforcement and imposing higher penalties. Erica Williams, the new chair of the PCAOB, an agency which has been seen as dysfunctional, signaled a shift in the board’s strategy. In October, Williams said the audit regulator will not be limited to “just the types of cases we’ve brought in the past or the penalties that we’ve sought in the past.”

Audit firms have come under increased scrutiny globally, as regulators around the world investigate them for reported failings. Last year, German authorities issued a report detailing the alleged misconduct of Ernst & Young (EY), one of the Big Four accounting firms, in relation to the implosion of fintech company Wirecard. This is just one of several similar cases recently.

After the scandal, EY said it had taken a number of steps to strengthen its fraud detection capabilities. But commentators have argued that there is a “fundamental conflict of interest” between audit firms and their clients because auditors are hired and paid by the companies they audit.

So what can businesses do to secure their compliance in the ever-changing regulatory environment? Staying on top of the changes and seeking independent counsel is always a good start.