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Accounting Fraud Task Force Gets Off to a Slow Start

June 16, 2014

The SEC formed its Financial Reporting and Audit Task Force in July 2013. So far, the group has yet to produce findings that have led to an enforcement action. Given more time, it’s expected that the task force’s efforts will lead to some legal complaints and settlements.

Nearly a year after forming the Financial Reporting and Audit Task Force, SEC lawyers still haven’t charged anyone with fraud as a result of the group’s investigations.

“Financial fraud cases are complicated, and they take time to build; they don’t happen overnight,” Enforcement Division chief Andrew Ceresney said during a question-and-answer session with the District of Columbia Bar Association in Washington on June 11, 2014. “And so we haven’t yet seen the first results of the task force.”

He stressed that he was confident that there will be enforcement actions in the future.

Ceresney explained that in the last few years, the SEC’s enforcement resources targeted cases that arose from the 2008 financial crisis. But the focus on accounting is “very important.”

“Obviously financial statements and the accuracy of financial reporting is critical to our markets,” said Ceresney, who’s been with the agency 13 months. “So you know you start off with the premise that it’s a critical area.”

The SEC brought a number of important financial reporting cases in 2014, such as CVS Caremark Corp., Diamond Foods Inc., and AgFeed Industries Inc.

“Some people sometimes attempt to attribute the cases to the new task force,” Ceresney said. “They are not the result of our recent effort, but they do reflect an increased focus on the area.”

The enforcement director doesn’t expect investigations to uncover violations that are reminiscent of the fraud epidemic of 2001-2002 that included companies like Enron, WorldCom, Adelphia Communications, and Tyco.

“That may be because controls have gotten better,” Ceresney said, citing the Sarbanes-Oxley Act of 2002. The requirements of the landmark law have made it more difficult for fraud to escape detection for very long.

Still, SEC officials are uncovering faulty financial reporting controls at some companies and weak implementation of accounting standards in areas that are traditionally sources of fraud, including revenue recognition, recording of expenses, setting aside loss reserves, and newer areas like goodwill.

Ceresney said Enforcement Division staffers opened some new investigations in the last six months in part because of the task force’s work. He stressed, however, that the purpose of the task force is not to find obvious cases.

“If there is big restatement that’s announced tomorrow, we are going to open a matter and look at that,” Ceresney said. “We don’t need a task force to identify those kinds of cases. But we need the task force to find cases that aren’t so obvious.”

Ceresney was asked whether the task force has been using the Accounting Quality Model being developed by the Division of Economic and Risk Analysis to ferret out financial reporting abuses.

“I think it’s still in prototype,” he said.

In the past few months, SEC officials have been downplaying the Accounting Quality Model’s prowess. It has sometimes jokingly been called robocop. The regulators say it will be just one of several tools they use to fight fraud.

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