The document discusses SEC Accounting and Auditing Enforcement Releases (AAERs), which describe violations of securities laws. The SEC's Division of Enforcement investigates possible violations, compels production of documents, and presents findings to the SEC for review. Academics have used AAERs as case studies in auditing courses and as data to study issues like earnings management. One study found nearly 300 alleged fraudulent financial reporting cases by examining AAERs from 1987 to 1997.

1. SEC Enforcement Actions – Premium Paper Help
Excerpt from Hansen, J.C. 2010. Where were the auditors? Using AAERS in introductory or
advanced auditing courses. Journal of Accounting Education 28 (2): 114-127. SEC
Accounting and Auditing Enforcement Releases – Background and Importance The
responsibilities of the SEC are performed through five divisions (Division of Corporation
Finance, Division of Trading and Markets, Division of Investment Management, Division of
Enforcement, and Division of Risk, Strategy and Financial Innovation). On their website
(http://www.sec.gov/about/whatwedo.shtml) the SEC gives a brief description of the
responsibilities of each of these divisions. Responsibilities for the Division of Enforcement
are described as follows: First and foremost, the SEC is a law enforcement agency. The
Division of Enforcement assists the Commission in executing its law enforcement function
by recommending the commencement of investigations of securities law violations, by
recommending that the Commission bring civil actions in federal court or before an
administrative law judge, and by prosecuting these cases on behalf of the Commission… The
Division obtains evidence of possible violations of the securities laws from many sources,
including market surveillance activities, investor tips and complaints, other Divisions and
Offices of the SEC, the self-regulatory organizations and other securities industry sources,
and media reports. All SEC investigations are conducted privately. Facts are developed to
the fullest extent possible through informal inquiry, interviewing witnesses, examining
brokerage records, reviewing trading data, and other methods. With a formal order of
investigation, the Division’s staff may compel witnesses by subpoena to testify and produce
books, records, and other relevant documents. Following an investigation, SEC staff present
their findings to the Commission for its review. The Commission can authorize the staff to
file a case in federal court or bring an administrative action. In many cases, the Commission
and the party charged decide to settle a matter without trial. The SEC also explains on its
website (http://www.sec.gov/divisions/enforce/friactions.shtml) that their list of AAERs:
…provides links to 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. This list only highlights certain
actions and is not meant to be a complete and exhaustive compilation of all of the actions
that fall into this category. Feroz, Park, and Pastena (1991) examine the first 224 AAERs
issued by the SEC. They give a brief history in their study on AAERs and state (Feroz et al.,
1991, p. 109): that the first 224 AAERs “describe allegations of financial disclosure
violations by 188 firms and their employees including fraud, nonfraudulent but reckless

2. disclosure, and accounting disputes that allege neither fraud nor recklessness. The number
of releases alleging reporting violations exceeds the number of cited violations because
some violations are the subject of multiple releases.” The findings described in the AAERs
are important to regulators and academics. Academics have outlined how AAERs can be
used in auditing courses. Licata, Bremser, and Rollins (1997) examine AAERs from their
inception in 1982 until August 1995 and they select specific AAERs that deal with SEC
actions against auditors. In their Appendix, they identify 60 out of the first 695 AAERs that
deal with (1) the Auditing Profession; (2) Audit Process; (3) Application of the Auditing
Process: Transaction Cycles; and (4) Completing the Audit and Offering Other Services.
Licata et al. (1997) provide specific cases for 7 out of the 60 AAERs, to be used as classroom
instructional material. Academic studies have used the AAERs as data. For example,
Dechow, Sloan, and Sweeney (1995) use AAERs to test the ability of different accrual-based-
earnings-management models to detect earnings management. They use AAERs as their
sample of companies that are known to have committed earnings management. Dechow,
Sloan, and Sweeney (1996) look at corporate governance of firms that have AAERs issued
for them. They find that firms manipulate earnings to obtain low-cost external financing.
They also find that AAER companies’ board of directors were composed of a majority of
non-independent board members and were less likely to have an audit committee. Beasley,
Carcello, and Hermanson (1999) compiled a report commissioned by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) that identifies instances of
fraudulent financial reporting that were reported in AAERs between January 1987 and
December 1997. Their search identifies “nearly 300 companies involved in alleged
instances of fraudulent financial reporting during the 11 year period” (Beasley et al., 1999,
p. 4). The implications of the findings of Beasley et al. (1999) provided a foundation for
portions of the Sarbanes Oxley Act (US House of Representatives, 2002). Case Requirements
Go to https://www.sec.gov/divisions/enforce/friactions.shtml and select a recent AAER to
analyze. Please DO NOT select an AAER related to insider trading or bribery as you will have
difficulty responding to Question 3 in such instances. Look for AAERs related to accounting
firms and CPAs. Additionally, it is important that you select an AAER that you understand
and can succinctly summarize the major details within 2 pages. 1. Briefly summarize the
ethical issue underlying the AAER. 2. How do the facts described within this AAER align
with the risk factors discussed in Chapter 4 of your textbook pertaining to inherent risk,
control risk, or detection risk? 3. Discuss how auditors could have prevented the AAER from
happening. (Note: If it is not directly clear how the external auditor may have prevented the
AAER from happening, discuss the role the internal auditor may have been able to play in
preventing the issue.) 4. How do you think this AAER may impact investor confidence in the
capital markets? How do you foresee this action impacting other stakeholders? Please try to
be specific.