Accountant Liability in SEC Cases

How Accountants Become Federal Targets: What the SEC and DOJ Don’t Tell You

Ask any accountant about liability, and they’ll talk about professional standards, maybe some insurance, and the risk of a client suing them over a tax or audit mistake. It’s easy to think of accountant liability as a purely civil concern – a matter of negligence, malpractice, or professional discipline.

But when it comes to SEC enforcement, that view is dangerously naive. There are dozens of cases where the Department of Justice (DOJ) – often after the SEC makes a referral – targets accountants not just as witnesses or secondary actors, but as primary defendants in criminal fraud cases. The SEC’s accounting fraud priority has led to accountants facing felony charges, asset forfeiture, and career-ending bans.

The Nascent Accountant Liability Trap

The myth that accountants only face civil exposure is fueled by a legal framework that seems to require a very high bar for criminal prosecution. But federal prosecutors have mastered the art of using email trails, spreadsheet manipulations, and willful blindness doctrines to turn what looks like professional judgment into an alleged criminal scheme.

How Accountants Lose Control

An accountant can be prosecuted for making false statements (18 U.S.C. Section 1001), wire fraud (18 U.S.C. Section 1343), or conspiracy to defraud the United States (18 U.S.C. Section 371) based on reporting errors, revenue recognition policies, or audit workpapers. What starts as an SEC inquiry into revenue recognition policies or internal controls can spiral into a DOJ indictment for wire fraud or conspiracy to commit securities fraud.

Consider some real-world examples:

• United States v. Paul J. Roberts: The CEO of Kubient, Inc., pleaded guilty to an accounting fraud scheme that inflated the company’s revenue and misrepresented the performance of key products. While the headline focused on the CEO, the underlying conduct involved accounting decisions that prosecutors argued crossed the line from aggressive to criminal.

• U.S. Navy Shipbuilder Pleads Guilty: A shipbuilder pleaded guilty to a financial accounting fraud scheme that involved obstructing a Defense Department audit. The accountant’s role was central to the scheme, highlighting how accounting manipulation can become the centerpiece of a criminal case.

SEC Referrals and the DOJ Pipeline

The SEC’s enforcement division has a long history of targeting accountants and auditors for alleged violations of GAAP and improper revenue recognition. When the SEC discovers what they believe to be accounting irregularities, they often refer these matters to the DOJ, which can lead to criminal charges. This pipeline from SEC civil enforcement to DOJ criminal prosecution has been a critical component in holding accountants and auditors accountable.

The Role of Auditors

Auditors play a critical role in the financial ecosystem by providing independent assurance on the accuracy of a company’s financial statements. However, when auditors fail to detect or report accounting irregularities, they can become targets of SEC enforcement actions. The SEC has made it clear that auditors who overlook or ignore internal control weaknesses, or who fail to properly audit a company’s revenue recognition practices, can face civil and even criminal penalties.

The 85 Percent Rule and Sentencing Realities

Federal sentencing guidelines apply harsh penalties for financial crimes, including accounting fraud. Under the 85 Percent Rule, defendants must serve at least 85 percent of their sentence in federal prison, meaning that accountants sentenced to prison for financial crimes face lengthy incarceration with little opportunity for early release.

The Asset Forfeiture Risk

The SEC and DOJ can freeze bank accounts and seize assets tied to alleged fraud, even before a trial. This means that accountants and auditors facing investigation may find their personal and professional assets at risk, further complicating their ability to mount a defense.

The Career Destruction

A criminal conviction for accounting fraud often results in automatic suspension or revocation of professional licenses. Even absent a conviction, SEC enforcement actions can lead to a permanent bar from practicing before the SEC, effectively ending an accountant’s or auditor’s career.

The Myth of Following Orders

Many accountants believe that they can avoid liability by claiming they were simply following client instructions. However, the SEC and DOJ have made it clear that this defense does not absolve accountants of their duty to adhere to professional standards and to report any suspected fraud.

How to Protect Yourself

Accountants and auditors can protect themselves by maintaining strict adherence to professional standards, conducting thorough audits, and ensuring that they report any suspected accounting irregularities to the appropriate authorities. It is also important to consult with legal counsel experienced in SEC enforcement matters to navigate the complex landscape of SEC and DOJ investigations.

Do Accountants Need Criminal Defense Lawyers for SEC Inquiries?

Absolutely. If you are an accountant or auditor facing an SEC inquiry, it is crucial to consult with a criminal defense attorney experienced in SEC enforcement and accounting fraud cases. The SEC’s enforcement division, in collaboration with the DOJ, can pursue both civil and criminal actions against accountants and auditors. Even a seemingly routine inquiry can quickly escalate into a full-blown investigation, leading to severe penalties, asset forfeiture, and career-ending consequences.

A criminal defense attorney experienced in SEC matters can provide invaluable guidance, help you understand the risks, and develop a strategy to protect your interests.