Fueled by high-profile cases involving Enron, WorldCom, Adelphia, and HealthSouth, accounting and disclosure fraud matters grew to as much as 33 percent of all U.S. Securities and Exchange Commission (SEC) enforcement actions in the run-up to 2007. Then, the global financial crisis triggered a dramatic shift in SEC priorities. The task force responsible for investigating accounting and disclosure issues was quietly put out to pasture. As a result, these cases dropped to just 11 percent of the SEC enforcement agenda by the end of Fiscal Year 2012.
That’s as low as they’re likely to get for quite some time.
This summer, new SEC Chairman Mary Jo White announced that the Financial Reporting and Audit Task Force is back on the beat – with a dedicated staff and sophisticated new data mining techniques aimed uncovering irregularities. At the same time, experts see troubling signs that recent upticks in corporate accounting fraud may continue in the near future.
This summer, Emily Chasan of the Wall Street Journal’s CFO Journal blog pointed to high interest rates, increased auditor turnover, and more frequent earnings statement revisions as potential harbingers of issues to come. This despite the fact that restatements are down and financial reporting is far less susceptible to problems than it was before the enactment of Sarbanes-Oxley and Dodd-Frank.
There are also the recent settlements and investigations involving JPMorgan, IBM, and a host of other public and private companies. Nothing motivates regulators like success. Having bagged big game in just the first few months of a rejuvenated and refocused effort, it’s safe to assume that what we’ve seen to date is just the tip of the iceberg.
Even more troubling for CFOs and boards of directors is that the legal, regulatory, and reputational landscape has grown far more perilous since the Enron era. Securities litigation trends are up. Shareholder activism is more prevalent. Global regulators are better organized and more attuned. The traditional media is more aggressive. And social media have exponentially diminished the time frame in which the story can spin beyond any company’s control.
Here’s a look at just how much the landscape has changed since 2000 – and how companies facing an accounting scandal can adapt to the new paradigm.
Accept new levels of transparency. In today’s regulatory and media environments, every company must assume that accounting issues will eventually see the light of day.
Consider what’s at heart of the SEC’s move to emphasize accounting enforcement. It’s the internal whistleblowers coming forward in droves as a result of the incentives put in place under Dodd-Frank. In Fiscal Year 2012, the SEC received 547 insider tips alleging accounting abuses, and the Commission wants more in the future. Speaking in September 2013, Financial Reporting and Audit Task Force Chairman David Woodcock said “Whistle-blowers are hugely important. We have cases on our docket now that no amount of analytics, no amount of screening or proactive efforts, in my opinion, would have ever discovered. It took someone on the inside to bring us this information.”
Consider also that the advent of social and digital media has opened new channels by which anyone with knowledge of the situation can go public – and that traditional journalists are digging deeper than ever before. In July 2011, Olympus CEO Michael Woodford had no idea about accounting irregularities at his company until he read about them in a small Japanese magazine called Facta. After Woodford turned whistleblower himself, the case erupted into one of the biggest corporate accounting fraud scandals in Japanese history.
Today, the story can break anywhere at any time – and even before you know it. If you’re caught trying to sweep it under the rug, the legal and reputational penalties at play will only intensify.
Understand how social media has changed the game – and how it has not. In the Enron days, the traditional media narrative was the only one that mattered, as social and digital media were still in their infancy. Today, that still largely holds true – with a few major exceptions.
In the midst of an accounting scandal, Twitter becomes flooded with automated messages linking to traditional media articles on the matter. That drowns out all social commentary and makes any meaningful conversation impossible to follow. Public companies have never turned to Facebook or YouTube as venues to discuss accounting issues, so stakeholders don’t either. As such, what results in virtually all situations is a Twitter, Facebook, and YouTube narrative that is either non-existent or directly reflective of the tone and volume of coverage in the New York Times, Wall Street Journal, CNBC, Bloomberg, and other major financial media outlets.
But Twitter, Facebook, and YouTube are no longer the only social media venues of importance. In recent years, we’ve seen the emergence of Seeking Alpha, Wikinvest, The Motley Fool, and other social networks that cater specifically to investors. These sites serve as platforms for Wall Street pundits and ordinary shareholders to share investment advice and their views on a wide variety of corporate valuation issues. Together, they attract more than 35 million users a month. As such, they warrant careful monitoring by any company that wants to keep its finger on Wall Street’s pulse as an accounting investigation progresses.
At the same time, public companies can’t overlook independent, high-authority financial blogs such as Business Insider, Zero Hedge, or The Big Picture. Investors turn to these sites for breaking news and views that might differ from traditional media coverage – so they demand careful monitoring as well.
Don’t follow the narrative; drive it. With so many ways for the story to get out, and so many voices influencing the conversation, it’s more important than ever that companies get out in front of coverage pertaining to an accounting investigation. Doing so sets the initial narrative; prevents negative developments from carrying undue weight; and, ultimately, keeps regulators, plaintiffs’ attorneys, and activist investors at bay by forcing them to swim upstream against the already dominant perception.
There are always legal, Regulation Fair Disclosure, and other compliance issues to consider when fomenting communications strategy; but that doesn’t mean a company should stand mute. From the moment concerns about financial irregularities are deemed credible, there are multiple positive messages a company can share – as long as it takes the right actions.
Do you have a stellar record for accurate financial reporting in the past? Has the board initiated its own internal investigation? Have independent auditors been brought in to assess the issue? Are efforts underway to ensure it is an outlier, and not an element of a larger systemic problem? All of these – when coupled with messages about the company’s commitment to rectifying the situation and seeing that it is never repeated – are points that can be leveraged to paint the company as a responsible steward of its, and shareholders’, finances.
As the investigation evolves, communications must remain equally aggressive – as each new development represents another opportunity for the company, or its adversaries, to shape the narrative anew.
Consider a board-specific communications strategy. Directors aren’t normally tapped as corporate spokespersons in crisis or peacetime; but accounting scandals present two reasons why they might be best suited for the job.
First, there now often exits the need for a firewall between the C-Suite and board as the audit committee moves forward with its investigation. That leaves directors, along with their legal and communications counsel, as the only corporate leaders positioned to comment.
Second, director communications lend a sense of independence and credibility to corporate statements. When senior managers comment on an investigation into events that took place under their watch, today’s audiences see the fox in the henhouse.
Keep it in context. JPMorgan and IBM will survive their recent accounting scandals and the resulting attention from the SEC. One reason is that they all maintain brands strong enough to withstand these types of controversies.
In any high-profile scandal, there is always the potential for the problem to create a vacuum in which the only news is the bad news. But by keeping the investigation in context, continuing to market, and continuing to communicate on all it does on behalf of its customers, communities, and shareholders, the company can ensure there is always a steady supply of goods news to draw attention from the bad.