SEC Renews its Enforcement Focus—With Vigor—on Accounting Issues (Quorum, March 2014)

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In the wake of Mary Jo White’s appointment as the new Chair of the Securities and Exchange Commission, the SEC’s Division of Enforcement has sought to aggressively investigate alleged accounting violations.

In July 2013, the SEC announced the creation of a Financial Reporting and Audit Task Force, which is tasked with the dual mandate of improving detection and increasing prosecution of accounting fraud. The SEC’s press release stated that the principal goals of the task force are “fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures,” with a focus on “identifying and exploring areas susceptible to fraudulent financial reporting . . . and use of technology-based tools.” Chair White emphasized the significance of this initiative as part of the SEC’s goal of “covering the whole market.”

The task force plans to address a variety of issues, including use of reserves, revenue recognition, audit committees and the role of auditors, with particular attention paid to independence issues. According to the SEC, the task force will develop new ways to identify accounting fraud through leading-edge technology such as the new Accounting Quality Model (known informally by some in the financial industry as “RoboCop”). The task force will solicit whistleblowers in order to learn about misconduct that would otherwise be difficult or impossible to detect. Unlike similar initiatives in the past to assist the Division of Corporation Finance in advising clients during the comment letter process, the purpose of the Financial Reporting and Audit Task Force will be enforcement, not prevention. In other words, this effort is not about helping companies spot errors, but rather about playing “gotcha” when there is a foot fault.

Of key importance, the renewed focus on accounting is accompanied by a new, aggressive policy stating that the SEC will seek admissions in some cases, rather than settling on a “neither admit nor deny” basis. Chair White has stated that the SEC will “strive for settlements that have a deterrent effect, and where appropriate, the added measure of public accountability that an admission often brings.” Adding to the sting, the SEC Enforcement Staff will not consider the collateral consequences of an admission on the company.

Although the SEC’s announcement came only a few months ago, related enforcement efforts are already evident. In November 2013, for example, the SEC charged the audit firm Sherb & Co., LLP and four of its accountants with having made false representations in connection with the audits of three China-based companies. Boards and management teams should focus on the measures listed above to respond to the SEC’s vigorous accounting initiative.

Topics:  Compliance, Enforcement, Fraud, Mary Jo White, SEC

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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