The enforcement actions provide early clues on how the SEC’s “risk-based data analytics” may flag public companies for investigation.

Key Points:

..On September 28, 2020, the US Securities and Exchange Commission (SEC or Commission) announced the first two settled actions arising from the Division of Enforcement’s EPS Initiative, which applies data analytics to detect earnings management practices that may expose potential accounting and disclosure violations.

..Both settling issuers had patterns of meeting or slightly exceeding consensus EPS estimates for consecutive quarters, followed by significant drops in EPS, suggesting similar patterns may trip the SEC’s data-monitoring protocol.

..The small misstatements at issue in the settled orders suggest the SEC is using the EPS Initiative to develop cases under a theory of materiality based on qualitative factors.

..Issuers that are flagged for investigation may face scrutiny for conduct unrelated to the EPS patterns or drops that triggered the investigation.

..Issuers should look carefully at EPS reporting that could make the difference between meeting or missing EPS consensus estimates, even if the difference is not quantitatively significant.