Financial Reporting

"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
This study examines U.S. Securities and Exchange Commission (SEC) sanctions against auditors over the period 1998–2010 that are related to instances of alleged fraudulent financial reporting by U.S. publicly traded companies. During that time period, there were 87 separate instances where the SEC imposed such sanctions, and this report summarizes our analysis of alleged auditor deficiencies noted by the SEC in these 87 cases.
In considering the results contained in this report, it is important to appreciate that SEC allegations of fraudulent financial reporting are rare, with 347 cases examined by the SEC from 1998–2007 out of thousands of U.S. public companies. 1 Despite the small number of fraud-related SEC enforcement actions, we believe that analysis of these 87 cases involving auditor sanctions by the SEC provides important insights for auditors and others concerned with improving audit quality, especially in the context of detecting material financial statement misstatements due to fraud. Thus, we highlight key findings related to the audits underlying these 87 cases.
The primary results of our analysis are as follows:
• From 1998–2010, we identified 87 instances of SEC investigations of fraudulent financial reporting leading to sanctions against auditors. Based on companies with available information for these 87 SEC investigations, the associated registrant companies were primarily small (median revenues and assets under $40 million) and concentrated in four key industries (over 40 percent of the sample is in financial services / insurance, general manufacturing,...