Impact of Broken Gate of the SEC on smaller audit firms

• The SEC’s introduction of Operation Broken Gate ensures that no audit firm, regardless of size, can be ignored or overlooked and also ensures that auditors of companies don’t run afoul of the SEC.
• Operation Broken Gate has signaled a stringent focus on enforcement action that is directed at auditors and audit committee members who fail in their legal responsibilities to investors as gatekeepers of fair financial reporting by public companies.
• The quality control defects and AAER charges published by the Operation Broken Gate can be used to raise awareness about the issues of critical importance to the PCAOB and the SEC. This information can be used by auditors to identify and remove potential gaps in quality control programs and ongoing training efforts.
• Prior to engaging with an audit client, auditors should ensure a firm and its assigned personnel have sufficient competence and capacity to audit the client, according to professional standards.
• The implementation of Operation Broken Gate has resulted in a significant increase in the quality and quantity of financial reporting cases and in numerous cases against auditors and audit firms of all sizes.
• Any auditors who have intentionally or negligently violated professional auditing or accounting standards; may harm their reputation from any settlements of sanctions imposed on them by the SEC. The settlement of sanctions is made public, posted on the SEC’s website, and are also frequently announced by a press release.
• Another potential impact to be considered is the effect of a settlement on the auditor’s license to practice as a CPA. In the U.S., a majority of the states require auditors to disclose any SEC disciplinary action to their state board of public accountancy. The state boards have the authority to open their own investigations and to revoke or suspend auditors’ CPA licenses, even where the SEC sanctions did not involve practice bars.

Impact of Broken Gate of the SEC on pink sheet public companies

• The implementation of Operation Broken Gate has made companies and entities of all types to take notice of the shift in approach, including the overall renewed emphasis on financial reporting and the focus on individual accountability, gatekeepers, and lesser violations.
• In order to prevent and detect violations of the securities laws and upgrades, companies should pay dedicated attention to the effectiveness of existing compliance and training programs.
• Companies facing the possibility of an SEC investigation should consider whether and how they will cooperate, including whether to self-report violations and how to address allegations of wrongdoing by individual directors, officers, or employees.
• The SEC’s Operation Broken Gate has impacted Directors of companies needing them to establish expectations for senior management and their companies and exercise appropriate oversight to ensure that those expectations are being satisfied.

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