SEC recently announced the creation of a new Financial Reporting and Audit Task Force in the Division of Enforcement along with a Center for Risk and Quantitative Analysis. The new groups come as the agency refocuses its enforcement program in the post market crisis era. The implications of these actions will be explored in a series of articles
On July 2, 2013, the SEC announced the formation of a Financial Reporting and Audit Task Force (“Financial Task Force”). Its purpose is to detect “fraudulent or improper financial reporting” and “enhance the [Enforcement] Division’s ongoing enforcement efforts related to accounting and disclosure fraud.” A similar group is being formed to focus on microcap fraud, according to the announcement.
The Center for Risk and Quantitative Analysis (“Analytics Group”) is also being created as part of the new focus on financial reporting. The new Analytics Group will work in close coordination with the Division of Economic and Risk Analysis and “serve as both an analytical hub and a source of information about characteristics and patterns indicative of possible fraud or other illegality.”
The formation of a new Financial Task Force, coupled with the creation of the Analytics Group, suggests a new focus for an enforcement program that has centered on insider trading, offering fraud, Ponzi scheme and market crisis cases since the 2009 reorganization of the Division. It also suggests that the new task force will adopt at least some of the risk analysis and metric oriented approach utilized by the Division of Enforcement since its reorganization.
If the new Financial Task Force has an impact similar to that of the 2009 reorganization which spawned record numbers of cases, it is reasonable to expect that the Commission will be opening a significant number of new investigations and bringing more actions centered on financial statement fraud and related reporting issues. Indeed, there are indications that those efforts may have been underway prior to the announcement. See, e.g., SEC v. Senior, Civil Action no. 3:12cv60 (N.D. Ind. Filed January 30, 2012) (accounting fraud action against former senior officers and outside auditors of British subsidiary of issuer).
This is not the first time that the SEC has focused on financial statement fraud and reporting issues. Following a 1998 address by then Chairman Arthur Levitt titled “The Numbers Game,” which decried the manipulation of financial statements to meet Wall Street earnings expectations, the agency brought a series of high profile financial statement fraud actions. The new task force can be expected to draw from, and build on, that history.
The critical question for issuers, directors, executives, their auditors and business partners is the approach the new task force will take. Knowing that focus should permit an examination of current practices now to avoid liability tomorrow. Stated differently, understanding how the SEC Enforcement plans to proceed is good business today and tomorrow.
To analyze the likely approach of the new task force, four key points will be considered:
1. The “Numbers Game” speech – the genesis of an earlier financial statement fraud effort;
2. Financial statement fraud cases brought in the wake of the “Numbers Game” speech;
3. Market crisis financial actions; and
4. The Enforcement Division’s use of risk analysis and big data.
Analyzing these points should provide a guide to the future approach of the new task force which can be used now by issuers, their executives and auditors to conduct an analysis of current practices to avoid liability tomorrow.
Next: The “Numbers Game Speech” – Genesis of an Earlier Financial Statement Fraud Effort and the roots of current efforts.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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