With more than 130 highly trained enforcement accountants at his disposal, Matthew Jacques, the Chief Accountant of the Securities and Exchange Commission (“SEC”), provided a firsthand glimpse into current enforcement objectives for policing accounting and auditor misconduct. Mr. Jacques was a featured panelist at the Securities Docket annual conference at the Mayflower Hotel in Washington, D.C. on Wednesday, October 23, 2019, along with forensic accountant Martin Wilczynski of Ankura Consulting, and defense counsel John J. Carney of BakerHostetler and Luis Mejia of Perkins Coie.
Enforcement of Accounting Fraud and Financial Disclosure Violations
Mr. Jacques emphasized the value of having a large staff of accountants to handle hard-to-detect financial reporting and accounting issues as well as complex accounting investigations. The panel focused on recent accounting enforcement actions and current trends and initiatives concerning accounting investigations and enforcement. The SEC historically draws accounting cases from self-reporting, tips and complaints, referrals and its own research.
However, Mr. Jacques disclosed that the Division of Enforcement (the “Division”) has also invested time and energy in technology to better detect fraud, such as the increased use of data analytics, to allow the SEC to detect complex fraud faster and catch bad actors more quickly. Mr. Jacques stated that the SEC will evaluate potential accounting cases brought to its attention based on considerations such as the egregiousness of the conduct, the size of the company and the SEC’s priorities.
While there has been a big emphasis by the SEC on self-disclosure and cooperation in recent years, Mr. Jacques identified two factors that are key to whether a company will receive cooperation credit: whether the cooperation helped the SEC accelerate its case, and the quality of a company’s remediation. Mr. Jacques emphasized the SEC’s desire to complete investigations quickly and efficiently, especially in financial disclosure and accounting fraud cases that tend to be some of the Division’s longest-running investigations because of their complexity.
The panel also addressed auditing firms as recent targets of the SEC due to their role as gatekeepers. Mr. Jacques commented that gatekeepers have been a focus of the SEC for a long time, and any behavior that comes close to the line of violating independence standards will be investigated, and charges will be brought if appropriate. Mr. Jacques emphasized the importance of keeping auditors independent and maintaining the integrity of the accounting profession. He also commented on a recent case in which the SEC charged a company for failing to properly disclose or accrue for contingent losses from a Department of Justice False Claims Act investigation after the company performed a damages analysis and was asked to sign a tolling agreement. Mr. Jacques stated that the SEC looks at the totality of events, not just a single event, and his view was that this was just one of many factorsthe SEC considers when deciding to bring an action.
Focus on Individual Liability
Mr. Jacques reiterated the SEC’s focus on individual accountability in accounting fraud cases, which has not always been an area in which individuals have been charged. Mr. Jacques recognized that in many situations, multiple individuals are involved in an accounting decision and that those decisions require judgment and can be difficult to make. When a determination is being made as to whether to charge an individual related to an accounting violation, the involvement of the individual in the alleged misconduct and the individual’s seniority will be taken into account. Whether an individual will receive cooperation credit can depend largely on whether the individual is truly helping the SEC accelerate its investigation.
Companies, accounting professionals and audit firms should be aware that with more than 130 accountants actively involved in cases, the SEC’s resolve to police financial statements, related disclosures and audits is extremely high. This resolve, coupled with its advanced use of data analytics to identify potential accounting issues, could likely result in more investigations.
Given the emphasis on self-disclosure and cooperation, companies must be proactive in assessing potential accounting issues internally and in their industry, and if a problem is identified, to determine with counsel if self-disclosure and cooperation are appropriate.