Can the SEC Go After My CPA License??

No. CPAs are licensed and overseen by the states in which they reside or work. Therefore, even when the SEC brings enforcement actions against accountants, it cannot impose discipline by revoking their state licenses. Nor can the SEC issue any orders that would directly impact their licensure status in general.

Under Rule 102(e), however, the SEC can impose a range of discipline against accountants and other professionals. These disciplines include censure, temporary practice bars, and permanent practice bars. With this in mind, while the SEC cannot revoke your state CPA license, it can bar you from “appearing or practicing before the Commission.”

The latter is a broad term, and even a temporary practice bar can have the practical effect of barring most accountants from performing public company accounting work, as well as from serving as an “accountant” for SEC-registered entities. Specifically, Rule 102(f) provides:

“The preparation of accountant reports filed with the Commission pursuant to the registration provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934 shall be deemed to constitute practice before the Commission.”

So, while an SEC enforcement action cannot directly result in the loss of your state CPA license, it can have significant side effects. State boards of accountancy and the PCAOB both have the authority to impose separate discipline based on the underlying misconduct alleged in the SEC’s charges.

What Can Trigger an SEC Practice Bar Against a CPA?

As a CPA, you need to know when, and how, the SEC can invoke Rule 102(e). Here are some examples.

1. Unethical and Improper Professional Conduct

Under Rule 102(e), “unethical or improper professional conduct” can trigger a range of disciplinary sanctions. When the SEC alleges unethical or improper conduct, this allegation can support a temporary or permanent practice bar.

2. Willful Violations of Federal Securities Laws

The SEC can also pursue disciplinary action under Rule 102(e) for “willful violations” of the federal securities laws.

3. Violations of Professional Standards by Accountants

Under Rule 102(e), the SEC can also sanction accountants for violating professional standards, but only in a limited number of cases. This rule reaches intentional, knowing, or reckless violations of professional standards, and also negligent conduct consisting of either a single instance of highly unreasonable conduct or repeated instances of unreasonable conduct.

For example, under Rule 102(e), the SEC may sanction an accountant under Rule 102(e) for failing to comply with applicable professional standards such as GAAP and GAAS, but only where that failure was intentional, knowing, reckless, or negligent in the ways the rule describes. In other words, just because an accountant violates these standards does not mean that an accountant will face SEC disciplinary action.

4. Accountant Standards Violations That Constitute Negligence

While Rule 102(e) restricts the SEC’s ability to target “unintentional” accountant standards violations, this does not mean accountants are not subject to SEC disciplinary action for such violations.

Rule 102(e)(1)(iv) defines “improper professional conduct” by an accountant appearing or practicing before the Commission. The Commission’s 1998 release adopting Rule 102(e)(1)(iv) clarify that “a highly unreasonable standards violation,” involving a failure that “would indicate that the violation was intentional, knowing, or reckless” in light of the circumstances, could support a sanction. Specifically, the Commission notes that violations should be distinguished based on the “particular standards in question,” and “the specific circumstances of each case.” In some cases, “the necessity to exercise heightened scrutiny would make it possible to find that an accountant engaged in improper professional conduct under Rule 102(e)(1)(iv)(B) even if his violation was not, strictly speaking, intentional or knowing.”

5. Repeated Accountant Standards Violations ( or “Incompetence”)

As noted above, Rule 102(e) only allows the SEC to target violations involving intent or recklessness. This does not necessarily mean that accountants who fail to comply with applicable standards are off the hook for accountant-specific discipline. In fact, Rule 102(e)(1)(i) reaches persons found “not to possess the requisite qualifications to represent others,” and Rule 102(e)(1)(iv)(B)(2) reaches “repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.”

So, while “unintentional or reckless” accountant standards violations will not be enough to invoke Rule 102(e), such violations can potentially support an “incompetence” charge under Rule 102(e). This charge would require repeated or “extensive” failures to comply with applicable standards, and, though the SEC is required to provide notice and an opportunity to be heard under Rule 102(e)(1), any such action by the SEC would still be potentially devastating in scope, consequences, and implications.

Could an SEC Bar Trigger State or PCAOB Discipline?

The relationship between the SEC and the state accountancy board is reciprocal. Just as an SEC bar does not necessarily have the potential to lead to loss of state licensure, the same cannot be said for state license suspension or revocation. For example, when an accountant’s state CPA license is revoked or suspended, this can automatically trigger the suspension of the accountant’s practice before the Commission as well. However, that does not mean that the SEC will necessarily defer to the state accountancy board in all cases. For example, if an accountant’s conduct triggers discipline by the SEC, the state accountancy board will potentially take separate disciplinary action based on that same conduct.

The PCAOB

Lastly, it is also important to consider the Public Company Accounting Oversight Board (or PCAOB). The PCAOB is the overseer of the accounting firms that audit public companies and SEC-registered brokers and dealers. It enforces both the accounting standards applicable to these firms and the professional standards applicable to auditing, reviewing, and vouching by these firms. The PCAOB can impose its own disciplinary sanctions, which are independent of both SEC sanctions, and state license revocation and suspension. For example, the PCAOB can impose both individual and accounting firm-specific sanctions, including:

I. Individual Sanctions

Individual sanctions include practice bars, whereby individual accountants are barred from “associating with PCAOB-registered accounting firms.” These individual sanctions (or bars) are separate from the suspensions and bars that the SEC imposes, and they are also separate from state license revocation and suspension. While a PCAOB bar will not necessarily result in state license revocation or suspension on its own, if it targets conduct that the state board considers “unethical” or “unprofessional,” a state bar may result as well.

II. Firm-Level Sanctions

Firm-level sanctions include the suspension or revocation of the accounting firm’s registration with the PCAOB. Because only PCAOB-registered firms are permitted to issue audit reports for public companies, revocation of a firm’s registration can, even if it is not a death sentence for the accounting firm itself, be a devastating blow. Once again, loss of registration with the PCAOB is separate from both SEC sanctions and state-level licensure.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

Can the SEC’s Division of Enforcement Impose Penalties Itself?

The Division of Enforcement investigates potential securities law violations. When the Division believes it has enough evidence to file an enforcement action, Division staff present their findings to the SEC Commission, which then decides whether to authorize the Division to file an enforcement action. Therefore, the Division staff do not adjudicate liability, as the Commission must authorize all filings.

When is the SEC Seeking Remedies?

When the SEC has decided to seek remedies, its claims will proceed either through federal court or in administrative proceedings. In either case, if the SEC is unable to prove liability after a trial or hearing, then the SEC will not be able to impose civil penalties, while a negotiated settlement will typically itself include an agreed civil penalty. If you do not settle and if the SEC proves liability through a trial or hearing, the SEC will then be entitled to seek remedies such as civil penalties.

Does the Division of Enforcement Have the Authority to Impose Final Civil Penalties?

No. Even though the Division of Enforcement handles investigations, the Division staff do not have the authority to impose final civil penalties against you. This is true even when the SEC pursues administrative proceedings. While the Dodd-Frank Act’s 2010 amendments expanded the SEC’s authority to impose administrative civil penalties (and the SEC sought to use this authority extensively in cases involving securities fraud), this is only one of two possible outcomes under the recently issued Supreme Court decision in SEC v. Jarkesy. In fact, the Supreme Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles that defendant to a jury trial, so the SEC must bring the action in federal court rather than adjudicate it in an in-house administrative proceeding.

What SEC Remedies are Available?

Within the realm of civil enforcement, the available remedies vary depending on the allegations involved. Depending on the case, the SEC can seek injunctions, return of ill-gotten money (disgorgement), prejudgment interest, civil penalties, other monetary sanctions, and pre-judgment interest.

How Long Can an SEC Investigation of a CPA Take?

SEC investigations can proceed either alongside or independently of criminal investigations by the Justice Department (DoJ). While the SEC may issue a demand for documents and testimony, criminal investigators will not issue subpoenas without authorization from a federal judge or grand jury. While the SEC will generally neither confirm nor deny the existence of an investigation, SEC investigations remain confidential, at least until public charges are filed.

What Causes an SEC Investigation to Begin?

An SEC investigation can begin when an individual or entity files a complaint with the SEC’s Office of Investor Education and Advocacy (OIEA), or when a “whistleblower” contacts the SEC’s Office of the Whistleblower. Additionally, SEC investigations can begin based on tips from other federal and state regulators, media reports, or the SEC’s own internal enforcement initiatives.

What Triggers a Formal SEC Investigation?

While investigations may initially be referred to the SEC’s Division of Enforcement as informal inquiries, they may later advance to formal investigations. This requires the Commission’s issuance of a formal order of investigation that authorizes the Division’s investigators to use compulsory subpoenas to gather documentary evidence and testimony.

Is There a Statutory Deadline for SEC Investigations?

There is no statutory deadline for the completion of an SEC investigation. While SEC investigations have the potential to continue for several years, there is no time limit on how long the SEC can use its investigative authority to seek evidence and testimony. This, of course, includes cases that involve complex allegations, such as allegations involving accounting fraud.

What are the Next Steps When the SEC Issues a Demand for Evidence?

When the SEC issues a demand for evidence, the next steps depend on the circumstances. The investigator should start by documenting the scope of the investigation. Then, you should determine the next logical steps. The SEC may not issue a formal subpoena, at least, not right away. If so, the best approach is usually to politely request more time for production and to ensure that your request for information from the SEC meets the standard requirements. In cases involving extensive alleged misconduct, the SEC will likely file an order that authorizes staff investigators to seek documentary evidence and testimony through compulsory subpoenas.

What Happens When the SEC’s Staff Investigators Reach Out for Additional Evidence?

After staff investigators review evidence you provide, they may seek additional documentation, testimony, and other evidence. You will then need to make informed decisions about how to move forward.

What Happens When the SEC’s Staff Investigators Complete Their Investigation?

Once the SEC’s investigators complete their investigation, the matter will then be reviewed by Division staff to determine whether to recommend any enforcement action, to the Commission. If the Commission decides that further action is warranted, an accountant may face administrative sanctions under Rule 102(e).

What Can a Tax Attorney Do That My CPA Cannot?

If you are facing an investigation by the SEC or the DoJ, there are several differences between what a tax attorney can do and what your CPA can do. These differences are important to consider when deciding whether to engage a tax attorney to work with your accountant (or accountant’s firm).

I. Litigation Experience

Your CPA or tax accountant cannot represent you in federal district or appellate courts. For this, you will need an attorney. However, if you have had questions about a tax controversy or need representation before the IRS, you may have seen your accountant or CPA serve as an advocate for you. This is because licensed attorneys, enrolled agents, and CPAs all have unlimited rights to practice before the IRS.

II. Attorney-Client Privilege

To qualify for attorney-client privilege, a communication must involve an attorney and their client. The communication must also be made in confidence and be made for the purpose of seeking or receiving legal advice. While a tax accountant is entitled to representation for you before the IRS, a communication to your tax accountant that is not an attorney would not be protected by attorney-client privilege. However, under 26 U.S.C. § 7525, there is a statutory privilege protecting communications between clients and “tax practitioners.” However, this privilege is not nearly as comprehensive as the one that is provided to attorneys under federal common law. For example, Section 7525 does not protect communications between you and your tax accountant in “criminal matters involving federal sentencing or sanctions.”

III. Privilege Regarding Accounting Records

Another issue is the nature of the materials you have provided to your CPA or other tax professional. Although communications made in confidence to an attorney to seek legal advice are protected, these protections do not apply to accounting records that you provided to your CPA or attorney for use in your tax accounting. As a result, in a situation where the SEC or the DoJ is aggressively seeking to use your accounting data as evidence, this data could be subject to disclosure.

IV. Company Counsel

Finally, company counsel is the lawyer that is hired to represent a business or an entity. As a result, your company counsel ordinarily represents the legal entity and does not represent every individual at the company or even at every level of seniority.

In the case of an entity, a target of an SEC investigation needs to find the right counsel. While companies or other entities do not have a Fifth Amendment privilege against self-incrimination, an accounting professional facing an SEC enforcement action still may need to rely on the Fifth Amendment to avoid testifying incriminatorily in a parallel civil and criminal proceeding.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.