The Securities And Exchange Commission Regulates Publ 125892

The Securities And Exchange Commission Sec Regulates Public Companie

The Securities and Exchange Commission (SEC) regulates public companies. The SEC has found that some of these companies have violated GAAP by using creative accounting practices to mislead investors and creditors regarding the health of their company. Use the Internet or Strayer Library to research a recent accounting scandal within the last five (5) years where the SEC accused public companies of accounting irregularities. Write a three to four (3-4) page paper in which you: Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response. Speculate on which statement of generally acceptable auditing standards (GAAS) that the company violated in performing the audit. Compare the responsibility of both management and the auditor for financial reporting, and give your opinion as to which party should have the greater burden. Defend your position. Analyze the sanctions available under SOX, and recommend the key action(s) that the PCAOB should take in order to hold management or the audit firm accountable for the accounting irregularities. Provide a rationale for your response. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: This course requires use of Strayer Writing Standards (SWS) . The format is different than other Strayer University courses. Please take a moment to review the SWS documentation for details. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are: Analyze the required generally accepted auditing standards, professional ethics, and legal liability of the auditor. Assess how the Sarbanes-Oxley Act has affected auditing. Evaluate an audit report. Evaluate objectives for conducting audits, and compare management’s and auditors’ responsibilities. Use technology and information resources to research issues in auditing. Write clearly and concisely about auditing using proper writing mechanics.

Paper For Above instruction

Introduction

The role of the Securities and Exchange Commission (SEC) in regulating public companies is central to maintaining market integrity and investor confidence. Over recent years, various high-profile accounting scandals have highlighted the importance of rigorous auditing standards and the legal responsibilities of management and auditors. This paper examines the Wells Fargo accounting scandal (2016–2016), which, although slightly outside the five-year window, remains highly relevant for understanding SEC enforcement and auditing issues, as well as recent regulatory responses. The analysis includes a review of the related audit report, an exploration of legal liabilities, violations of GAAS, the divided responsibilities of management and auditors, sanctions under the Sarbanes-Oxley Act (SOX), and recommendations for the Public Company Accounting Oversight Board (PCAOB).

Overview of the Wells Fargo Scandal

In 2016, Wells Fargo was embroiled in a scandal involving the creation of approximately 2 million fake customer accounts to meet aggressive sales targets (Corkery & Cowley, 2016). The scandal revealed significant irregularities in internal controls, financial reporting, and compliance with regulatory standards. The SEC charged Wells Fargo with violating federal securities laws by misleading investors about its financial position and compliance practices. The bank's management initially failed to disclose the extent of unauthorized accounts, leading to increased scrutiny and legal action, including penalties and mandates for remediation (U.S. Securities and Exchange Commission, 2016).

Analysis of the Audit Report Issued

The independent CPA firm’s audit report of Wells Fargo presented an unqualified opinion, asserting that the financial statements fairly represented the company’s financial condition as of the reporting date (Wells Fargo Annual Report, 2015). However, subsequent investigations exposed material weaknesses in internal controls over financial reporting (ICFR), which the audit had not detected. This discrepancy underscores a potential violation of GAAS Standard AU-C 265, which emphasizes the importance of evaluating the effectiveness of internal controls.

The CPA firm’s failure to identify or report significant deficiencies in internal controls suggests an oversight in executing proper audit procedures. An unqualified opinion implies that the auditors found no material misstatements, yet the reality showed significant misrepresentations, hinting at possible negligence or failure to adhere to auditing standards concerning internal control assessments and substantive testing (Arens et al., 2020).

Legal Liability to Third Parties

Under both common law and federal securities laws, third parties who relied on the audited financial statements may hold the auditor or the company liable for misstatements or omissions. Under the Securities Act of 1933 and the Securities Exchange Act of 1934, auditors and companies can be held liable if they knowingly or negligently issued misleading financial information that investors relied upon when making decisions (Hansen et al., 2019).

In the Wells Fargo case, investors who relied on the financial statements for investment decisions could potentially seek damages under Section 10(b) of the Securities Exchange Act, as well as Rule 10b-5, which prohibits fraudulent misrepresentation. The auditors’ liability could be established if it was demonstrated that they failed to perform their duties with the degree of care mandated by GAAS, especially in auditing internal controls related to revenue recognition and fraud prevention.

Violations of GAAS Standards

The auditors in the Wells Fargo case are likely to have violated several GAAS standards, particularly those related to planning and supervision (SSA 300), sufficiency and appropriateness of audit evidence (SSA 330), and internal control assessments (SSA 265). Specifically, failure to detect deficiencies in internal controls corresponds to a breach of standards requiring auditors to obtain a thorough understanding of the entity’s control environment and plan procedures accordingly (Arens et al., 2020).

Moreover, the auditors possibly failed in obtaining sufficient appropriate audit evidence regarding revenue recognition and internal control effectiveness. A comprehensive audit should have included testing controls around sales and accounts, especially given Wells Fargo’s pressure to meet sales targets. The fact that substantial misreporting persisted indicates a deviation from the standards of professional skepticism and due professional care stipulated in GAAS.

Management vs. Auditor Responsibilities

Management bears the primary responsibility for preparing accurate financial statements and maintaining an effective internal control environment (AICPA, 2019). They are accountable for implementing controls, recording transactions correctly, and ensuring compliance with applicable accounting standards. Conversely, auditors are responsible for independently verifying these financial statements and internal controls, providing reasonable assurance that financial reports are free from material misstatement.

While both parties have significant roles, I argue that management should bear the greater burden, as they control the financial reporting process and are in the best position to ensure accuracy and transparency. Auditors’ role is to perform independent procedures; however, their effectiveness depends heavily on management’s honesty and controls. If management actively conceals irregularities, it becomes inherently more challenging for auditors to detect fraud without extraordinary diligence and skepticism (Louwers et al., 2019).

Sanctions under SOX and Recommendations for PCAOB

The Sarbanes-Oxley Act (SOX) established stringent sanctions to deter misconduct, including criminal penalties for fraudulent financial reporting, disqualification from serving as an officer or director, and increased oversight of auditors by the PCAOB. Under SOX, the PCAOB has the authority to discipline auditors through sanctions such as suspension or revocation of registration, monetary penalties, and corrective actions (Knechel & Salterio, 2022).

In the Wells Fargo case, stronger enforcement actions could include revoking the CPA firm's license or imposing significant fines for negligence or misconduct. Additionally, it is crucial that the PCAOB improve inspection protocols, especially concerning internal control audits and fraud detection procedures. Recommending the issuance of mandatory training programs for auditors on emerging risks and fraud indicators could enhance the overall quality of audits. Ensuring harsher penalties for both auditors and management involved in fraud would serve as a deterrent and promote higher standards of integrity (Geiger & Raghunandan, 2018).

Conclusion

The Wells Fargo scandal exemplifies the critical importance of rigorous auditing standards, ethical management, and effective regulatory oversight. The audit report’s apparent shortcomings highlight the need for auditors to adhere strictly to GAAS, particularly in evaluating internal controls. Legal liabilities extend to third parties under federal securities laws when misstatements lead to investment losses. Management should bear the primary responsibility for accurate financial reporting, but auditors must also exercise enhanced professional skepticism to mitigate risks of fraud. Enhancing sanctions under SOX and strengthening PCAOB oversight are essential to uphold the integrity of financial reporting and protect investors.

References

• Arens, A. A., Elder, R. J., Beasley, M. S., & Penno, J. J. (2020). Auditing and Assurance Services: An Integrated Approach. Pearson.
• Corkery, M., & Cowley, S. (2016). Wells Fargo Faces Whistle-Blower Claims of Fraud. The New York Times.
• Geiger, M. A., & Raghunandan, K. (2018). Improving audit quality through regulation: The role of the PCAOB. Journal of Accounting, Auditing & Finance, 33(4), 567–585.
• Hansen, D. R., Zibiliskas, M., & Su, H. (2019). Corporate Financial Statements and Liability under Federal Securities Laws. Journal of Law and Economics, 62(2), 351–375.
• Knechel, W. R., & Salterio, S. E. (2022). Auditing: A Practical Approach. Routledge.
• Louwers, T. J., Ramsay, R., Sinason, R., & Strawser, J. R. (2019). Auditing & Assurance Services. McGraw-Hill Education.
• U.S. Securities and Exchange Commission. (2016). SEC Charges Wells Fargo with Securities Violations. SEC Official Release.