GAAP Chats: Recent SEC and PCAOB Enforcement Actions
GAAP Chats: Recent SEC and PCAOB Enforcement Actions

GAAP Chats: Recent SEC and PCAOB Enforcement Actions

Mike:  It’s time for an episode of CPAs Gone Bad on the podcast! This is where Chris and I dig into and discuss some recent enforcement actions from the SEC and PCAOB. Why? So hopefully we learn from and don’t repeat others’ mistakes!

Mike: Welcome to GAAP Chats, the podcast dedicated to all things accounting, brought to you by GAAP Dynamics. I’m your host, Mike Walworth and with me, as always, is my faithful partner, Chris Brundrett. We hope you’ll join us on our journey today as we share our passion for accounting and help change the way you train. 

Chris: What no evil laugh this week? We’re finally talking about your favorite topic…enforcement actions! And nice homage to the TV show Cops by the way! And nice singing!

Mike: Admittedly, my singing needs some help. However, I really do like reviewing enforcement actions.

Chris: Why do you like it so much?

Mike: Well, as we discussed last week, it is a bit of schadenfreude. However, I really do think it helps to see where others have gone wrong so, hopefully, we as a profession don’t repeat others’ mistakes.

Chris: Ok. Before we start, where do you find these enforcement actions?

Mike: They are published on the SEC and PCAOB’s websites. I’ll put links to them in the notes to the podcast. As for the SEC, it has a wide net. There is a lot of enforcement action. They do a lot of insider trading and enforcement of the Foreign Corrupt Practices Act, there is enforcement there.  I tend to look at the Accounting and Auditing Enforcement Releases (or “AAERs”). These are financial reporting related enforcement actions concerning civil lawsuits brought by the commission in federal court and notices and orders concerning the institution and/or settlement of administrative proceedings.

Chris: You said civil lawsuits. Does the SEC ever bring criminal proceedings?

Mike: No. The SEC and PCAOB can only bring civil proceedings, and I believe that is because they are a function of Congress. So, it’s a separation of powers thing. But don’t you worry! If legal proceedings are warranted, they both have friends at the Department of Justice!

Chris: Right, and if there is true criminal activity, then they will be referred to the Department of Justice and they will take it from there. I mean, think Madoff. It wasn’t the SEC that put him in jail, but ultimately it was referred to the DOJ and went through the court system. 

Mike: Yeah, and when we look at enforcement actions, they are actually up. As for the SEC, during fiscal year 2022 they filed 760 total enforcement actions, a 9% increase over prior year. However, what was really shocking was the amount of money the SEC collected!

Chris: How much?

Mike: Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.4 billion, the most on record in SEC history and up from $3.9 billion in fiscal year 2021.

Chris: Cha-ching! That’s nearly double. Do we expect these fines and penalties to continue to grow?

Mike: Hopefully not, according to SEC Director of the Division of Enforcement, who said “ While we set a Commission record this past fiscal year for total money ordered at $6.4 billion, including a record $4.2 billion in penalties, we don’t expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.”

Chris: That’s a tough message coming from the SEC. What about the audit side over at the PCAOB?

Mike: Well, as you know, there’s a new sheriff in town. And, let me tell you, Chair Erica Williams does not mess around! According to her speech at the AICPA and CIMA Conference on Current SEC and PCAOB Developments, in 2022 the PCAOB announced sanctions related to:

  • Exam cheating,
  • Modifying work papers,
  • Noncooperation with investigations,
  • Unlawfully obtaining and using confidential PCAOB information, and
  • Failure to have sufficient quality control processes in place to guard against ethical violations.

 And she said, and I quote, “Let me be clear: the PCAOB will not tolerate unethical behavior. I have said before, and I will say again, the PCAOB means business when it comes to enforcement”

Chris: Definitely a change from the previous chair.

Mike: Yep. He was a Trump appointee and, if I’m being honest, not a whole lot got done while he was there. Now, to be fair, he did have a global pandemic during some of his term. Anyways, in 2022, they imposed the highest total penalties in PCAOB history. As I said, there’s a new sheriff in town. It is interesting how both the SEC and the PCAOB had the highest penalties on record. 

Chris: And sometimes the two agencies do work together or tip each other off. I mean often times if there are issues at a company that the SEC has found, there may also be an issue with the audit. Sometimes they go hand and hand.  Are you ready to discuss a few specific enforcement actions? What do we have for our listeners?

Mike: Well, let’s stay with the PCAOB for the first one because I’m going to continue a story that we started in last week’s podcast.

Chris: Okay, what story might that be. 

Mike: I’m talking about BF Borgers!

Chris: Oh, I remember them. They’re that firm with only two partners that audits over 100 publicly traded companies and, as a result, are annually inspected by the PCAOB. 

Mike: Yeah, I mean the company is smaller than GAAP Dynamics. And, if you remember, I said in the last podcast that one of those two guys is new because the old Audit Director was sanctioned by the PCAOB.

Chris: Oh yeah, right. What happened?

Mike: Well, Bo-Shiang (“Eric”) Lien was barred from being associated with a registered public accounting firm and fined $25,000 because he violated PCAOB rules and auditing standards in conjunction with the audits of the financial statements of three issuers. These three issuers were:

  1., an Indiana corporation and provider of Chinese-language financial information that also sold industrial hemp-infused cosmetics and liquor in China.
  2. United Cannabis Corporation, a Colorado corporation focused on developing therapeutics related to the endocannabinoid system, and owned IP related to medical and recreational marijuana and marijuna-infused products.

Chris: I’m beginning to see a theme here. Perhaps Mr. Lien was just high!

Mike: No comment. Anyway, the third company, China Pharma Holdings was a Nevada corporation but headquartered in China. It manufactured and marketed generic and branded pharmaceutical and biochemical products primarily to hospitals and retailers in China. So, to my knowledge, nothing to do with marijuana!

Chris: What did he do or, better yet, what did he fail to do?

Mike: Well, at a high level, according to the PCAOB in its enforcement document dated May 24, 2022, Mr. Lien failed to:

  • Exercise due professional care and professional skepticism;
  • Obtain sufficient appropriate audit evidence supporting significant accounts, including accounts designated as a fraud risk or a significant risk; and
  • Comply with multiple other PCAOB auditing standards.

Chris: That’s kind of generic audit language there. Did they give any specific examples of where he went awry?

Mike: Sure. I can give you a few specifics. First, in the audit of It was noted that revenue grew 1,000% over the prior year with most of the sales occurring in the last few months of the year.

Chris:. That’s a huge audit risk! That is a big jump in revenue, and at the end of the year. My audit radar is going up!

Mike: Right! And the engagement team properly identified it as a significant risk. But here’s where they went wrong. First, it was noted that 62% of its revenue was derived from selling to wholesale customers in China. Essentially, the company was acting as an agent in the transactions.

Chris: And, let me guess, the company was acting as an agent but recorded revenue on a gross basis as if they were a principal in the transaction. 

Mike: You got it! So, essentially they recorded too much revenue, and  the audit team failed to evaluate whether the company’s revenues were reported in accordance with GAAP. As we said in a previous podcast, “The GAAP is back, baby!”

Chris: ASC Topic 606 talks about principal vs agent considerations and it has been a huge issue area for a lot of companies because there is judgment involved determining whether you are a principal or an agent. Sometimes it is very clear, but sometimes it’s trickier to identify. As you said Mike, if you are the principal you are recognizing revenue and cost of sales, or gross. If you are an agent you are recognizing the net. It’s a big difference. 

Mike: Right, and ASC 606 is all about control. Who controls the goods, prior to getting it to the customer. 

Mike: So back to Mr. Lien, on the engagement, Lien and his team relied on third-party delivery records to test both cut-off and valuation, however these delivery notes did not include information about the title for the liquor shipped nor anything about sales prices or other evidence related to the amounts, or values, of the sales transactions.

Chris: In other words, he didn’t have sufficient appropriate audit evidence.

Mike: That’s right. There are  some other issues but I don't think we have time for all of the issues.  Moving on to his audit of United Cannabis, the issue relates to the engagement team’s testing, or lack thereof, related to goodwill that comprised 37% of total assets.

Chris: What was the issue?

Mike: As you know, goodwill is not amortized under GAAP, but it does need to be assessed for impairment at least annually. Well, despite evidence indicating that goodwill was clearly impaired, Lien accepted management’s contradictory representation that there were no relevant changes in circumstances indicating that its goodwill may be impaired. Basically, he failed to perform further audit procedures to investigate the basis for management’s conclusion or evaluate its reasonableness. Furthermore, to support its reported goodwill balance, the company relied on a valuation report prepared by a third-party specialist.

Chris: Let’s break this down a bit further. There is a qualitative test that you can apply upfront to determine whether goodwill is impaired. If there is potential that it is impaired then you move on to the actual quantitative test and see what the outcome is. It may or may not be impaired. A big factor in that test is if there has been a significant change in facts and circumstances. As you said, there is a lot of evidence that that had taken place, but then management and the auditor ignored that. 

Mike: Right, and the report talked about what those factors were. Clearly, a quantitative test should have been done. 

Chris: You’re mentioning this valuation report. What did the engagement team do to test this valuation report?

Mike: Well, basically management told Mr. Lien that despite all of these factors, goodwill is not impaired. And he didn’t test it. Secondly, management gave him a valuation report substantiating this goodwill balance. But, you asked what he did and the answer is absolutely nothing! He did obtain the report, but he failed to perform any procedures to understand the work performed or assumptions used by the third-party specialist and to test the data provided by management and relied on by the specialist.

Chris: Oh boy! Well, enough about Mr. Lien. What say we turn to the SEC enforcement action that you picked?

Mike: Sure. This one relates to the SEC charging Eagle Bancorp and its former CEO Ronald Paul, with negligently making false and misleading statements about related party loans extended by the bank to Paul’s family trusts.

Chris: Before we get into it, what was the final punishment?

Mike: According to the SEC press release dated August 16, 2022, Eagle agreed to cease and desist from future violations and to pay disgorgement of $2.6 million, prejudgment interest of $750 thousand, and a civil penalty of $10 million.

Chris: That’s the second or third time you’ve mentioned “disgorgement.” What is that?

Mike: According to Cornell Law, disgorgement is a remedy requiring a party who profits from illegal or wrongful acts to give up any profits they made as a result of that illegal or wrongful conduct. The purpose of this remedy is to prevent unjust enrichment and make illegal conduct unprofitable.

Chris: Got it! So a lot of these enforcement actions require giving up elicit gains plus penalties and interest on top of that. What happened to Mr. Paul, the former CEO?

Mike: He agreed to permanent injunction, to a two-year officer and director bar, so he can serve as an officer or director of a publicly traded company, and to pay disgorgement of $109,000, prejudgment interest of $22,216, and a penalty of $300,000.

Chris: Let’s get into the details. Briefly, because we’re running out of time, what happened?

Mike: Essentially from March 2015 through April 2018, EagleBank, Eagle Bancorp’s principal subsidiary, loaned money to family trusts affiliated with Paul and did not properly disclose such transactions as required by both SEC regulations and U.S. GAAP.

Chris: I have two questions for you. First, how much are we talking about? Second, how did anyone find out?

Mike: Great questions. Let me deal with the second question first. In December 2017 a short seller released a report that alleged, among other things, that Eagle had significant undisclosed related party loans. Eagle vehemently denied the report claiming these loans were not related party loans, which is why they didn’t disclose them. As for the loan amounts, we’re talking $90 million as of December 31, 2017 and $73 million as of December 31, 2016.

Chris: Not exactly chump change, but probably “immaterial” to the overall loan balances.

Mike: Well, total loans outstanding at December 31, 2017 were $6.4 billion, so these intercompany loans that weren’t disclosed as such represented only 1.4% of total loans. However, as you know, the definition of materiality is not just related to quantitative amounts, but also qualitative factors. And, at December 31, 2017, the previously-reported related party loan balance was $61 million, but Eagle should have included, but did not include, the $90 million of related party trust loans, so that balance more than doubled!

Chris: And the definition of materiality also focuses on whether an investor or potential investor would change their opinion based on the inclusion or omission of the balance.

Mike: Definitely. And after the short seller report came out claiming omitted related party loan balances, Eagle Bancorp’s stock dropped by more than 24%. So, I think, the answer is “yes” it would’ve impacted an investor’s decision.

Mike: Essentially the SEC states that acting in his corporate capacity as CEO, Chairman and President of Eagle, Mr. Paul negligently failed to ensure that Eagle properly disclosed these related party loans in its filings and statements. Moreover, the company failed to maintain the appropriate internal processes to prevent such a disclosure failure. In his senior position at Eagle, Mr. Paul was also liable for these failures.

Chris: And just to add on, the auditors are probably liable as well. Just a reminder that related party transactions are always a significant audit risk for which evaluating the design and implementation of internal controls is required by both U.S. GAAS and PCAOB auditing standards.

Mike: Check out the big brain on Brad! After that “drop the mic” moment, why don’t you take us out?

Chris: That’s all for this episode of GAAP Chats, your source for all things accounting.  Notes and resources from today’s episode are linked in the description and as always you can find us online at, and @gaapdynamics across social media. It’s never too late to become a GAAPologist! Head over to our website and subscribe to our blog so that you’re the first to know what’s new with GAAP Dynamics.

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