Overview of SEC Issues with Financial Disclosures and Auditors

In a speech this week, SEC Enforcement Chief Andrew Ceresney discussed the types of wrongdoing the SEC has seen over the past few years in financial disclosures and auditing. As the securities regulator has been winding down its prosecution of the financial crimes from the Great Recession, or lack thereof according to some, the SEC has returned to its fight against accounting fraud. The SEC has more than doubled its enforcement actions for issuer reporting and disclosure since fiscal year 2013.

The issues identified by Ceresney include:

Revenue Recognition

The SEC has seen manipulation of revenue recognition, including issues with percentage of completion accounting, invalid bill and holds, and sham revenue transactions.

Valuation and Impairment

The Director said this area has been a “prominent theme” in its financial reporting actions over the past few years. In the speech, he identified valuation adjustments and management discretion as avenues that they see to enhance performance in times of economic turmoil.

Earnings Management

The SEC has continued to see cases of manipulating financial results to meet analyst expectations, which were the “hallmark of some of the major accounting cases in the early 2000.”

Disclosures

In order to protect investors and allow them to make informed investment decisions, the SEC has brought a number of cases concerning deficient disclosures. These cases have run the gamut from insufficient disclosure of looming problems and poor performance, to executive perks, to insufficient related party disclosures.

Internal Accounting Controls

According to Ceresney, the SEC has brought charges for violations of the internal accounting controls provisions of federal securities law even in the absence of fraud charges. These actions are brought to prevent future misstatements or misconduct from happening.

Audit Committee Members and External Auditors

Gatekeepers are critical to accurate disclosures and will be the focus of a securities investigation when they have failed to reasonably carry out their responsibilities. The SEC closely scrutinizes the auditors in “every potential financial fraud case” to determine whether their audit was reasonably conduct.

The SEC has also brought a few cases recently against audit committee members in the last couple years even though most “carry out their duties with appropriate rigor.” These cases stemmed from an audit committee member learning information suggesting that company filings were materially accurate, and did not take the steps necessary to review all of the facts and become satisfied with their accuracy.