Wednesday, December 16, 2015

SEC Staff Highlights 2015 Enforcement Issues

By Amanda Maine, J.D.

Officials in the SEC’s Division of Enforcement highlighted issues faced by the division in 2015 at the AICPA’s annual conference on SEC and PCAOB developments. Director Andrew Ceresney provided a broad overview of developments at the division, while Chief Accountant Michael Maloney discussed the division’s financial reporting cases over the past year.

Ceresney said that since the financial crisis, the SEC has devoted resources to its financial reporting enforcement program, including 114 financial reporting cases this year compared to 79 last year and fewer than 60 two years ago.

Asset management. In addition to financial reporting cases, the division has been active in pursuing cases in the asset management investment advisory area, including cases against firms regarding fees and expenses, typically involving the lack of disclosure. Prominent cases against private equity firms include recent actions against KKR, Blackstone, and Fenway Partners, Ceresney said.

Insider trading. Ceresney noted that in the last six years, the division has brought more than 650 cases related to insider trading. In a recent case that involved nine defendants who also faced criminal proceedings, the SEC was able to use analytical tools to track suspicious patterns, he said. The SEC’s case against overseas persons that hacked into newswire press releases before they were published to the public was made on purely circumstantial evidence, according to Ceresney. Ceresney also credit the assistance of FINRA, on whose own tools and resultant referrals the SEC relies.

FCPA. The division also brought actions for Foreign Corrupt Practices Act (FCPA) violations against Avon, BNY Mellon, and Hitachi, Ceresney added. Themes in the division’s FCPA program include a focus on individuals and encouraging cooperation and self-reporting. Regarding the latter, Ceresney noted that the division’s settlement of FCPA charges with Goodyear, while requiring disgorgement of ill-gotten gains, did not result in a civil penalty being imposed due to the company’s cooperation with the SEC during the course of its investigation. In another FCPA case, the SEC entered into a deferred prosecution agreement with a Florida engineering firm as a result of the firm’s cooperation and self-reporting, Ceresney added.

Financial reporting trends and issues. Regarding the division’s cases related to financial reporting, Maloney reviewed trends and recurring problems his office has encountered over the last year. In the current enforcement landscape, there is a better awareness of the risks of improper financial reporting, he said. Awareness of the rules on financial reporting should be a deterrent to bad conduct, according to Maloney.

Dynamics driving the financial reporting issues faced by Maloney’s office include traditional issues such as tone at the top, pressure to manage earnings, company growth outpacing audit infrastructure, and independence issues. While no one issue is driving the enforcement program relating to financial reporting, Maloney said that specific areas of concern include revenue recognition, faulty valuation and impairment decisions, and disclosure issues (including guarantee obligations and related party disclosures).

Maloney warned preparers to be especially critical of the risk of faulty valuations, which can affect a broad array of financial reporting areas and span many different asset types, entity types, and industries. He also reiterated that enforcement actions are not about questioning the good faith professional judgments of accountants, but focus on assumptions that are unsupported or outdated.

Sources of investigations. Maloney also discussed sources of the division’s investigations. Traditional sources are still the most common, he said, such as restatements, self-reporting, whistleblowers, and internal and external regulatory referrals. He also praised proactive efforts like the division’s fraud group initiatives.

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