SEC RULES OF PRACTICE
SEC Rule of Practice 102(e)
Suspension and Debarment of Accountants and Auditors
KEY FACTS
- Statutory provision: SEC Rule of Practice 102(e) under the SEC Rules of Practice.
- Scienter standard: Improper Professional Conduct (Negligence or Intent).
- Standard statutory remedies: Permanent or multi-year practice suspensions, prohibition from auditing public company filings.
Statutory Scope & Legal Description
Authorizes the Commission to censure or deny, temporarily or permanently, the privilege of appearing or practicing before the Commission to accountants who engage in improper professional conduct or lack character and integrity.
Legal Elements Required for Enforcement Liability
- 1 Intentional or knowing violation of professional standards (GAAS/PCAOB)
- 2 Single instance of highly unreasonable conduct or repeated instances of unreasonable conduct
- 3 Directly sanctions audit partners and public accounting firms
Legal Standards Profile
Scienter Burden: Improper Professional Conduct (Negligence or Intent)
Statutory Remedies: Permanent or multi-year practice suspensions, prohibition from auditing public company filings.
Jurisdiction: United States Federal Law
Enforcement Precedents Charging SEC Rule of Practice 102(e)
10 Selected Precedents| Case | Status | Overstatement | Penalties |
|---|---|---|---|
| WorldCom: $11B Operating Expense Capitalization Fraud WorldCom falsely classified over $3.8 billion in routine line costs as long-term capital expenditures and improperly released reserve cushions, transforming massive operational losses into billions in fraudulent pre-tax earnings. | Adjudicated | $11.0B | $750.0M |
| Enron Corp.: Off-Balance-Sheet SPEs and Mark-to-Model Fabrication Enron used hundreds of unconsolidated special purpose entities (SPEs) funded with Enron stock to hide debt, scrub merchant investment losses, and book billions in mark-to-model paper gains. | Adjudicated | $1.2B | $23.8M |
| Wirecard AG: 1.9 Billion Euro Fictitious Cash Fraud German DAX-30 payments firm Wirecard fabricated one quarter of its consolidated balance sheet (1.9 billion euros), falsely claiming the cash was held in trustee escrow accounts in the Philippines. | Adjudicated | $2.1B | $0 |
| Satyam Computer Services: $1B Fabricated Cash and Ghost Employees Satyam Chairman B. Ramalinga Raju confessed that 94% of the company's reported cash balance (over $1 billion) was entirely fictitious, inflated by 7,561 fake invoices and non-existent interest income. | Adjudicated | $1.0B | $290.0M |
| Carillion plc: Aggressive Contract Revenue and Going-Concern Concealment UK government contractor Carillion concealed catastrophic construction project losses, booking expected future claims as current revenue while masking £1.5B in debt using supply chain financing. | Adjudicated | $1.4B | $27.0M |
| Luckin Coffee: $300M Fabricated App Sales and Circular Cash Scheme Fabricated store coffee orders through fake corporate customer vouchers and circular mobile app payments. | Settled, neither admitted nor denied | $311.0M | $180.0M |
| Parmalat: $4.9B Forged Bank of America Deposit Certificate Forged letters on Bank of America stationery confirming €3.95B in nonexistent offshore Cayman escrow accounts. | Adjudicated | $4.9B | $0 |
| Toshiba Corporation: $1.9B 'Challenge' Pressure Profit Inflation CEOs mandated impossible profit targets ('Challenges'), pushing divisions into postponing losses and underestimating construction costs. | Adjudicated | $1.9B | $62.0M |
| Sino-Forest Corporation: Fictitious Timberland Holdings and Valuation Fraud Short seller Muddy Waters revealed company did not own the millions of hectares of Chinese forestry assets claimed. | Adjudicated | $3.0B | $0 |
| Americanas S.A.: R$20B Off-Balance-Sheet Supplier Risk Financing Concealed 20 billion reais in 'risco sacado' (drawn risk) bank debt used to pay suppliers. | Alleged | $4.1B | $0 |