Bruch also thinks enforcement should “actively dispel the notion they are obtaining disgorgements to return to investors,” since “it rarely happens, takes up a disproportionate amount of time, and distracts staff from more important functions.” Indeed, a recent GAO report reveals that according to the SEC’s records, it collected only 14 percent of the $3.1 billion in disgorgements due it between 1995 and 2001, in part because the amounts were often more than the offenders could afford to pay.
The division of corporate finance is also lacking the strategic processes it needs, experts say. While the division is currently able to keep up with 10-K reviews, “all we need is for the offerings [IPO] market to get juiced up again and those demands will strain us,” notes one longtime SEC professional, who likens the division’s ad hoc handling of the August 14 certification statements to “a Turkish bazaar.” A lack of coordination between numbers-focused accountants and prose-oriented attorneys creates “a no-man’s land in terms of MD&A analysis.” And a grab bag of IT tools doesn’t help. The SEC’s technology can’t routinely prescreen financial statements for unusual trends, or automatically draw in the outside data sources SEC staff needs for analysis, or easily attach outgoing comment letters to a company’s internal Edgar file.
Certainly, a good portion of the new funds are likely to be spent on arming the staff with technology to better discern red flags from false alarms, and bring more cases to the “final resolution” CFOs like Ruotolo so desperately want. The current appropriations bill sets no requirements for IT spending, but Sarbanes-Oxley suggested a total of $108 million should go toward improving IT as well as postSeptember 11 recovery efforts.
Measures of Effectiveness
Yet no one thinks that spending alone will be enough–particularly not SEC chairman Harvey Pitt, who engaged McKinsey & Co. last spring “to find out how we can use what we have more efficiently, to find out how we can use technology to help us, and then to find out what we really need,” as he said during a July appearance on “Meet the Press.” McKinsey’s report, which was due to be made public as CFO went to press, could indeed offer some important insights into how the SEC should direct its funds. Whatever the outcome, though, experts say the agency will have to create new and regular operational metrics to gauge the success of its strategy.
Currently, it’s the enforcement statistics that grab the headlines. But the number of actions alone can be deceptive, since the investigation of a single company can generate multiple actions. Plus, the numbers don’t capture the numerous inquiries and investigations that take up the staff’s time but don’t escalate to charges, which Bruch estimates outnumber the actions by a multiple of 10. And some say those metrics are underscoring the wrong philosophy of fraud-fighting. “I have long taken the position that it’s better to spend the money on the front side of the process, on the division of corporation finance, than it is on the back side of the process, in enforcement,” says Walter Scheutze, former chief accountant for the SEC. “By the time enforcement gets to it, the horses are out of the barn.”