After a period in which the Securities and Exchange Commission turned most of its attention to misdeeds involving collateralized debt obligations, subprime mortgages and similar products of the financial crisis, the SEC appears to be focusing on accounting fraud and faulty financial reporting again — with a vengeance, insiders say.
In July, for instance, the commission announced that newly formed SEC task forces will explore the use of the regulator’s increased data-mining capability to detect financial-reporting fraud at corporations. Their work, according to the SEC, will be based on tools related to its recently assembled Accounting Quality Model.
Such activity, along with statements alluding to increased emphasis on accounting fraud by SEC Chair Mary Jo White, suggests the commission is revving up its fraud-detection engines again. That point was made several times during a Directors Roundtable program on accounting crises held last week at the New York City offices of Weil, Gotshal & Manges. According to the assessments of a number of corporate and regulatory insiders who spoke, a June New York Times headline is a more than accurate representation of what’s going on at the SEC in terms of accounting fraud regulation: “The S.E.C. Is ‘Bringin’ Sexy Back’ to Accounting Investigations.”
If that’s true, it would represent a marked shift in the regulatory agenda. The SEC’s numbers, in fact, reveal a distinct trailing off in the commission’s investigative activity in this area after 2008. In fiscal-year 2012, for instance, the commission opened 124 financial fraud and issuer disclosure investigations, a steep descent from 304 in 2006 and 228 in 2007. There was also a slowdown in accounting-fraud-related cases specifically, with the SEC filing 79 of them in 2012 compared with 219 in 2007.
Besides the regulatory attention claimed by real estate, investment and banking-related fraud following the collapse of Lehman Brothers, some have attributed the fall off in financial-reporting-related probes to the successes of the Sarbanes-Oxley Act. The regulation improved internal controls so much, the theory goes, that fraudulent activity itself dwindled.
But Harvey Kelly, a managing director and global head of financial advisory services at AlixPartners, strongly disagreed. “I subscribe to the theory that Sarbanes-Oxley did not cure all, and I’m sure some people’s eyes would bug out if they saw some of things that I’ve seen happen in this day and age, whether it’s the emails people write or flagrant accounting abuse,” he said.