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 naïve. 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. § 1001), wire fraud (18 U.S.C. § 1343), or conspiracy to defraud the United States (18 U.S.C. § 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:
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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. (Source)
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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. (Source)
These cases aren’t outliers. They represent a broader strategy where the SEC and DOJ target accounting professionals for decisions that, in hindsight, are characterized as deliberate fraud.
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 (Generally Accepted Accounting Principles) 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.
Recent SEC Cases Involving Accountants
In recent years, the SEC has brought a number of high-profile enforcement actions against accountants and auditors. These cases often involve allegations of improper revenue recognition, internal control failures, and misstatements of financial statements. For example, in 2023, the SEC charged a leading accounting firm with failure to detect irregularities in a major audit, resulting in significant penalties and professional censure. These cases highlight the SEC’s continued focus on ensuring that accountants and auditors adhere to strict professional standards.
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 SEC’s enforcement division has emphasized that auditors have a duty to ensure the integrity of financial statements and that their failure to do so can have serious consequences.
The “85% Rule” and Sentencing Realities
Federal sentencing guidelines apply harsh penalties for financial crimes, including accounting fraud. Under the “85% Rule,” defendants must serve at least 85% 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.
The Importance of Internal Controls
The SEC places significant emphasis on the effectiveness of a company’s internal controls. Accountants and auditors who fail to identify or report weaknesses in internal controls can face enforcement actions. The SEC’s enforcement division has prioritized cases involving internal control failures, particularly those that lead to financial statement misstatements or revenue recognition issues.
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.
Final Thoughts
The landscape of accountant liability in SEC cases is evolving, with an increasing focus on criminal prosecution for accounting fraud. Accountants and auditors must be vigilant in maintaining professional standards and internal controls to avoid becoming targets of SEC enforcement and DOJ prosecution. By understanding the risks and taking proactive measures, accounting professionals can protect themselves and their careers from the severe consequences of SEC 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. They can also ensure that you do not inadvertently make statements or take actions that could be used against you in a criminal prosecution. By retaining experienced legal counsel early in the process, accountants and auditors can better navigate the complex landscape of SEC and DOJ investigations and mitigate the risk of severe consequences.
The Bottom Line
The myth that accountants and auditors only face civil exposure is just that—a myth. Federal prosecutors have become adept at turning professional judgment calls into criminal cases, with severe penalties. Accountants and auditors facing SEC inquiries or investigations must recognize the risks and take appropriate steps to protect themselves.
Alina Veneziano
Alina Veneziano is a senior-level CPA who focuses on corporate compliance, tax planning, and finance issues within the law firm of Spodek Law Group. Ms. Veneziano holds a Master of Laws degree from the University of California Los Angeles School of Law and a Juris Doctor from the Elisabeth Haub School of Law at Pace University.
