SEC settlements can bring unintended consequences for CPAs

The Securities and Exchange Commission regularly brings enforcement actions against accounting firms and certified public accountants. In fiscal year 2015, the SEC brought actions under its Rule 102(e) — which allows the SEC to bar accountants from practicing before the Commission — against 76 accountants and accounting firms. The majority of these enforcement actions end in settlements, in which the respondent neither admits nor denies the SEC’s allegations, and agrees to accept a practice bar, a financial penalty, or both. Respondents frequently settle in order to avoid costly litigation against a well-funded adversary, and to put an unpleasant experience behind them. But CPAs and accounting firms should know that these “no-admit, no-deny” settlements with the SEC may not put an end to their legal troubles. To the contrary, a settlement with the SEC can, and often does, prompt aggressive disciplinary action by the California Board of Accountancy.

The Board of Accountancy has the authority, pursuant to Section 5100 of the California Business and Professions Code, to impose discipline on a CPA or accounting firm based solely on the fact that the SEC has previously imposed discipline in a matter that is substantially related to the practice of accounting. The board is not required to find any underlying wrongdoing before imposing discipline. The mere fact that the SEC has already imposed a sanction is enough. This is true even if the discipline imposed by the SEC resulted from a “no-admit, no-deny” settlement.

Discipline imposed by the board can be severe. Even when a disciplinary action results from an SEC settlement, and no underlying wrongdoing has been proven, the board may nonetheless decide to impose sanctions up to and including the permanent revocation of an accounting license.

Worse still, the board’s enforcement staff takes the position, relying on Business and Professions Code Section 141, that any purported factual “findings” in an SEC disciplinary order are “conclusive” evidence of the underlying facts, and that respondents in the board’s disciplinary proceedings may not even introduce evidence in an attempt to challenge or explain those “findings.” But in the context of an SEC settlement, any “findings” in an SEC order are typically drafted not by neutral factfinders, but by the staff of the SEC Division of Enforcement — the same lawyers who prosecute the SEC’s enforcement actions. The courts have not yet weighed in on the validity of the enforcement staff’s expansive interpretation of Section 141, so in the meantime there is a risk that the administrative law judges who hear the board’s disciplinary matters will agree with the enforcement staff and treat the SEC’s “findings” as conclusive and unrebuttable evidence of wrongdoing.

So, how can CPAs and accounting firms protect their accounting licenses when considering a potential settlement with the SEC?

Consult with experienced counsel. Before entering into any settlement with the SEC, accountants (and their lawyers) should consult with counsel with experience in Board of Accountancy disciplinary proceedings. Experienced counsel will help you understand the risks of settling with the SEC so that you can make a more fully informed decision.

Be prepared to accept some level of discipline from the board. Expect that if you settle with the SEC, the Board of Accountancy will seek to impose, and will likely obtain, at least some degree of discipline. The board’s disciplinary guidelines call for, at minimum, a three-year term of probation. If maintaining your accounting license in good standing is of paramount importance, then choosing to litigate against the SEC, for those with meritorious defenses and the resources to fight, may be a more attractive option than settling, Negotiate the most favorable SEC settlement possible. The board’s enforcement staff takes the position that the more serious the SEC settlement appears on its face, as measured by the length of the practice bars and the amount of any penalties, the greater the degree of discipline that should be imposed by the board. Conversely, an SEC settlement with shorter practice bars and smaller penalties should help to convince the board that something less than license revocation is appropriate.

Don’t forget to report the settlement to the board. Business and Professions Code Section 5063 requires licensees to report to the board, within 30 days, any practice bar ordered by the SEC. The board occasionally disciplines CPAs for failing to comply with this reporting requirement. The board is going to find out about an SEC settlement eventually; it is better if it finds out directly from you.