Andrew Ceresney, SEC Co-Director of the Division of Enforcement, recently gave a talk on financial reporting and accounting fraud. Mr. Ceresney reviewed statistics showing declines in restatements and accounting fraud cases. He noted this could be attributable to reforms introduced by Sarbanes-Oxley. He expressed his doubts about whether there has been a drop in actual fraud in financial reporting as may be indicated by the numbers of investigations and cases that have been filed. He stated “Our view is that we will not know whether there has been an overall reduction in accounting fraud until we devote the resources to find out, which is what we are doing.”
According to Mr. Ceresney, what the SEC needed was a small group of people focused on case generation – on exploring proactive initiatives that would generate new accounting fraud investigations for staff in the Division to pursue. As a result, the Division created the Financial Reporting and Auditing Task Force.
To fulfill its mandate and find promising investigations, the Task Force plans to launch various initiatives. These may include closely monitoring high-risk companies to identify potential misconduct, analyzing performance trends by industry, reviewing class action and other filings related to alleged fraudulent financial reporting, tapping into academic work on accounting and auditing fraud, and conducting street sweeps in particular industries and accounting areas.
The Task Force will also utilize recently developed technologies such as the SEC’s Accounting Quality Model and related tools, which uses data analytics to assess the degree to which a company’s financial statement appears anomalous. With this tool, Mr. Ceresney believes the SEC can better compare performance among firms and detect outliers that suggest possible fraud.
As for specific areas of focus, Mr. Ceresney anticipates that the Task Force and the SEC investigative staff will continue to cover a wide variety of issues. For example:
The SEC is very interested in the manner in which management and auditors make decisions with respect to reserves.
Revenue recognition issues will remain a staple of the SEC’s financial fraud caseload.
The SEC will continue its focus on audit committees, which Mr. Ceresney believes serve as a sort of gatekeeper for audit quality.