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Where is the SEC heading on accounting enforcement and disclosure?

Mary Jo White, chair of the Securities & Exchange Commission (SEC), appeared before the House Financial Services Committee at the end of April. In her opening statement, White ran through several SEC efforts. Among them was an update on the Financial Reporting and Audit Task Force she created last year. "As a result of the work of the Task Force, a number of new investigations and inquiries are underway, including matters focused on both traditional and emerging financial fraud issues," White said. She alluded to two recent cases, mentioning neither by name. In one, the SEC charged five executives at the now-defunct Dewey & LeBoeuf law firm with facilitating a $150 million fraudulent bond offering. The second case cited four executives in China at AgFeed Industries Inc. who used a variety of methods to inflate revenue from 2008 to mid-2011. In both instances, the SEC has opened court cases. White didn't mention the $20 million settlement the SEC landed in April from CVS Caremark Corp., which fraudulently omitted information from a $1.5 billion bond offering in 2009.

White also waded into accounting issues, briefly discussing the SEC's incipient effort to make changes to Regulation S-K, which dictates what needs to be included in SEC 10-Ks, 8-Ks, and other documents. In that context, she mentioned that the SEC's staff is coordinating with the Financial Accounting Standards Board (FASB) to identify ways to improve the effectiveness of disclosures in corporate financial statements and to minimize duplication with other existing disclosure requirements.

Keith Higgins, director of the SEC's Division of Corporation Finance and a key member of the SEC's staff, went far beyond White's short statement when he addressed an American Bar Association (ABA) meeting in mid-April. He talked more in-depth about where the SEC is heading in terms of Reg. S-K changes, mentioning, for example, the potential of looking "at any redundancy between Management's Discussion and Analysis (MD&A) disclosures and the financial statement footnotes." He also noted that the Commission plans "to explore whether there is overlap between the GAAP [Generally Accepted Accounting Principles] requirements in the footnotes to the financial statements and what the Commission's rules require."

Is the White SEC being more aggressive in regard to accounting fraud than past SECs? The results aren't in yet. Thomas O. Gorman, partner at Dorsey & Whitney LLP, says, "While there has been much talk about the Task Force, how it functions, and the manner in which it is trying to use big data to identify and develop such cases, little has resulted." But he adds that it isn't surprising, noting that these types of cases traditionally take painstaking investigation and work to identify, develop, and prosecute. Gorman worked at the SEC as senior counsel, Division of Enforcement and special trial counsel, Office of the General Counsel, in which he was responsible for the investigation and litigation of securities enforcement actions, accounting, and auditing cases. Gorman argues the penalties accepted by CVS weren't very harsh. "The SEC settled for an injunction and a fine. There were no procedures put in place to implement the directive of the injunction and ensure that going forward there would not be a repetition of the issues in the future. Yet that is a key SEC goal in any enforcement action. This isn't effective enforcement."

In regard to potential SEC changes to Reg. S-K, Jim Loughmiller, cofounder and managing director of ARC Consulting LLC, says that management within companies provide a significant amount of unnecessary disclosure because they, their audit committees, and the auditors worry about "today's litigious environment" and the legal implications of omitted data. "Additional direction and guidance from the SEC would be helpful here, but any revised regulations will still be subject to interpretation," Loughmiller says. "As such, additional examples and interpretive guidance as per the SEC Financial Reporting Manual, but even more in-depth, would be ideal."
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Title Annotation:GOVERNMENT; Securities & Exchange Commission
Author:Barlas, Stephen
Publication:Strategic Finance
Geographic Code:1USA
Date:Jun 1, 2014
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