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Overview of the Brattle Report on Auditor Enforcement

In 2024, the Brattle Group released a significant report detailing the state of enforcement actions by the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) against auditors. The findings indicate a spike in enforcement activities that began in 2022; however, a series of legal challenges played a crucial role in shaping these proceedings.

Key Findings from the Report

Elevated Enforcement Activity

The report indicates that 2024 saw a continuation of heightened enforcement activity, primarily driven by the PCAOB, which accounted for a substantial 88% of total actions initiated against auditors. A total of 58 actions were reported, with the PCAOB carrying out 51 of those, marking the highest level of activity since 2017. Together with the SEC, both regulators imposed $52.2 million in monetary sanctions against auditors, representing a 66% increase from the previous year and significantly exceeding the averages of earlier years.

Influence of the Supreme Court Ruling

One of the most striking elements of this year’s findings is the impact of constitutional challenges on enforcement activity. Particularly, the Supreme Court's June 2024 ruling in SEC v. Jarkesy found that the SEC's method of pursuing financial penalties via administrative proceedings was unconstitutional. This ruling not only dampened SEC activity — which dropped by 50% in 2024, accounting for only seven auditor actions — but also led to a notable decline in PCAOB activities following the ruling's release. In fact, the second half of 2024 saw the lowest level of PCAOB actions since 2018.

Record Penalties and Future Predictions

Despite the dip in activity in the latter half of the year, penalties imposed by the PCAOB reached a new peak, totaling $35.7 million. This figure is more than 23 times higher than the average penalties imposed during the PCAOB's previous administration, showcasing the agency’s ongoing commitment to enforcement.

The Brattle Group anticipates that the ramifications of the Jarkesy ruling, along with similar legal challenges, will evolve the landscape of auditor enforcement significantly into the future. The report suggests that these issues, alongside potential changes arising from future presidential administrations, may further influence the operational dynamics of both the PCAOB and SEC.

Implications for Auditors and Stakeholders

For auditors and the firms involved, the findings of this report highlight the complexities currently at play in the enforcement landscape. Stakeholders should remain vigilant as developments unfold, especially in light of potential constitutional challenges that may disrupt traditional enforcement strategies.

As the regulatory environment continues to adapt, firms must ensure compliance with existing laws and be prepared for unexpected changes. The Brattle Group's insights serve as a crucial resource for understanding these evolving dynamics and preparing for future enforcement trends.

For a complete view of the report and its implications, readers can access the full document on the Brattle Group's website: Brattle Group.