Two Telling Moves From SEC

The image of the Trump 2.0 Administration is starting to emerge at the Securities and Exchange Commission! On Tuesday the agency both muscled out the head of the Public Company Accounting Oversight Board and dropped FCPA charges against two former executives of Cognizant Technologies — acts that, taken together, send a clear signal of where the SEC’s priorities are.

We should start with the PCAOB, since that move is likely to have more long-term repercussions for more companies. SEC chairman Paul Atkins essentially fired PCAOB chairman Erica Williams, who had run the audit industry regulator since 2022. Technically Atkins asked Williams to resign, and her last day will be July 22; but let’s not dance around what really happened here: Atkins sacked Williams.

“The dedicated staff of the PCAOB are among the most talented and hardworking professionals with whom I have had the opportunity to work, and it has been my honor to serve alongside them,” Williams said in a prepared statement. “With high economic uncertainty increasing the risk of fraud, the PCAOB’s mission is as important as ever. It’s critical the expert PCAOB staff continue to be empowered to carry out their work of ensuring American investors are protected.”

Atkins released his own terse statement, saying, “Today I accepted Erica Williams’ offer to resign as chair and a board member of the PCAOB and thanked her for her service. I am grateful she has agreed to stay on until July 22nd.”

To be clear, Atkins has the legal authority to oust the PCAOB chairman, and he’s not even the first SEC chief to do so. His predecessor Gary Gensler fired almost the entire board in 2021 amid allegations of long-running and truly bonkers dysfunction at the agency. 

What happens next? Presumably Atkins will appoint a new chairman more in line with his light-touch approach to regulation and enforcement. One ideologically compatible choice would be someone like PCAOB board member Christina Ho, except Ho is a CPA and long-time professional audit and the Sarbanes-Oxley Act specifies that the PCAOB chairman cannot be someone from the audit industry. 

Regardless, we will have a new PCAOB chairman sometime soon, who will take the agency in a very different direction from Williams’ aggressive posture on audit firm oversight and enforcement. So we’re now likely to see more enforcement actions against audit firms where the punishment is whipping by wet noodle.

I’m more curious to see how new PCAOB leadership will proceed on auditing standards. For example, it’s inevitable that the new chairman will revive the idea of more relaxed audits of internal control over financial reporting, a chew toy of Project 2025 and congressional Republicans for years. 

But what about standards for using artificial intelligence in audits, or how to audit AI systems running a company’s financial reporting? Or how about reorienting the whole idea of audits to focus more on cybersecurity and access control, since strong controls there will simplify so many other investor risks elsewhere? Those are emerging issues that desperately need thoughtful attention, rather than the dogmatic claptrap we so often see in Washington.

FCPA Charges Against Cognizant Execs

The other telling item is the SEC’s decision to dismiss civil FCPA charges against two former executives of Cognizant Technologies, Gordon Coburn and Steven Schwartz. 

You might remember the original case against Cognizant from 2019. Cognizant agreed to pay a total of $25 million to settle criminal and civil FCPA charges, stemming from $2 million that the company paid — allegedly at the direction of Coburn and Schwartz — to secure building permits from government officials in India. 

The Justice Department indicted both Coburn and Schwartz in 2019 for their roles in the scheme, and the SEC filed civil charges against the men too. 

The misconduct was certainly egregious, but Cognizant won a declination to prosecute thanks to the board’s decision to self-disclose the misconduct to regulators promptly and to engage in extensive cooperation and remediation. This all happened before the Justice Department’s Corporate Enforcement Policy, mind you, so the company had no guarantee that it would receive such a favorable resolution. As I said at the time, “In many ways what happened with Cognizant is an excellent case-study for corporate ethics and compliance done right,” and I stand by those words now. 

Coburn and Schwartz, however, fought their indictments in federal court for years. The two were poised to go to trial earlier this year. Then President Trump got elected, paused FCPA enforcement, and you can guess what happened next. The Justice Department moved to drop the charges, and the criminal case against them went away in April. 

Now the SEC has followed suit, even though civil charges carry a lower burden of proof. 

Why? The official word from the SEC is that its decision “rests on its judgment that the dismissal is appropriate as a policy matter, not on any assessment of the merits of the claims alleged in the action. Furthermore… the commission’s decision to seek dismissal of this action does not necessarily reflect the commission’s position on any other case.”

Uh huh. Sure, SEC. 

An alternative theory is that this case no longer fits with the Trump Administration’s new FCPA enforcement priorities, as described in a policy memo from the Justice Department in June. That policy memo said the Justice Department only wants to prosecute corporate corruption cases relevant to national security or drug cartels, or to corruption that somehow thwarts American businesses’ ability to compete abroad.

Cognizant bribed Indian government officials to win construction permits for corporate campuses. That doesn’t match any of the above-mentioned criteria, so it’s doubtful that the Justice Department would ever bring the Cognizant case if it happened today. 

The Securities and Exchange Commission — working under severe personnel cutbacks from earlier this year, and still without a permanent enforcement director — seems to be following suit, not bothering to proceed with an FCPA case whose fact pattern no longer fits the preferred profile. 

A sign of the Trumpian times.