Sure, the SEC may have been a little laid back about things in 2013, but by all accounts that’s about to change – and how.
Last year, it seemed that the regulatory body had almost lost interest in pursuing the enforcement of financial reporting regulations, bringing fewer actions against financial fraud and issuer disclosure than at any time in the previous decade.
Just 68 cases felt the full force of the SEC’s fury. Even if you add in a sprinkling of Foreign Corrupt Practices Act cases, the number was still just 73, but that won’t be the case in 2014.
For starters, the Dodd-Frank Whistleblower bounty program is gathering popularity, and the carrot of a reward (part of any monies recovered as a result of enforcement action) could tempt some hesitant whistleblowers to pick up the phone and dial the SEC’s number.
Last October the SEC awarded its biggest bounty to date – $14million – which could certainly act as an incentive for others to come forward.
In July last year the SEC’s Enforcement Division announced the formation of a new Task Force – the snappily titled Financial Reporting and Audit Task Force. This specialist group of attorneys and accountants are set to weed out financial-statement, issuer-reporting and disclosure violations, wherever they may be.
This group of federal ‘Untouchables’ will be deploying the Accounting Quality Model (AQM), colloquially known as ‘RoboCop’. This quantitative analytic device is used to, in the words of the SEC, “discern whether a registrant’s financial statements stick out from the pack.”
One of the biggest red flags that could catch the attention of RoboCop is if a company writes off a large amount of debt in a relatively short period, which suggests it could be re-positioning the debt in an accrual “bank” to smooth out the income figures.
2014 will definitely be the year of the Task Force at the SEC, with a greater degree of co-operation between various departments. The Financial Reporting and Audit Task Force won’t be an entirely autonomous unit, but instead will work closely with the Enforcement Division’s Office of the Chief Accountant, the SEC’s Office of the Chief Accountant, the Division of Corporation Finance and the Division of Economic and Risk Analysis.
This almost unprecedented level of inter-departmental co-operation is designed to ensure that nobody slips through an increasingly tightening net.
However, there are concerns that the SEC may be overreaching its limits. The new AQM tool, promises of bounties, and greater co-operation between various departments and Task Forces brings with it a heightened expectation of more enforcement actions.
The worry is that this expectation may lead to the Enforcement Division getting a little over-zealous and bringing cases that could be regarded as ‘marginal’ at best.
A lack of evidence may not be the only issue though, as in July the SEC announced that in some cases the SEC would not rest until the defendants admitted wrongdoing. This badgering of defendants could result in some very protracted cases that could eat into the federal budget.
It certainly sounds like the SEC gloves are well and truly off this year, so now may be the right time to appoint a specialist accountant to double check that the SEC Task Force won’t be tempted to come after you in 2014.