As I have previously discussed here in detail, the SEC announced in 2013 that it would be greatly sharpening its focus on accounting fraud cases. Among other things, the agency established a Financial Reporting and Audit Task Force in July 2013 staffed with lawyers and accountants specifically focused on generating new financial reporting and accounting fraud cases for the Enforcement Division. The agency also stated that the work of the Task Force would be aided by several new technologies such as the “Accounting Quality Model” (a.k.a “RoboCop”), and an increasingly strong flow of whistleblower tips.
Recently-released enforcement data ("Select SEC and Market Data") from the SEC's FY 2014 have sparked some interesting analyses of whether the SEC's renewed focus on financial reporting and accounting fraud cases is already bearing fruit. This week, the WSJ reported ("SEC Gets Busy With Accounting Inquiries") that according to the new data, the SEC filed 99 financial reporting actions in FY 2014 -- a 46% increase from the 68 such cases filed in FY 2013. In addition, the WSJ reported that the SEC launched over 100 new financial and accounting fraud investigations in FY 2014, about 30% more than in FY 2013.
A closer look at the SEC's FY 2014 data on financial and accounting-related cases (or “Issuer Reporting and Disclosure” cases in the SEC's lingo) reveals, however, that a surge in these cases may not be upon us just yet. As noted in an article this week by Jason Flemmons and Martin Wilczynski of FTI Consulting, 27 of the 99 actions in the “Issuer Reporting and Disclosure” category for FY 2014 are “stop order” proceedings under Section 8(d) of the Securities Act (and 20 of those 27 actions were brought on the same day against a series of mining companies controlled by a single person).
Flemmons and Wilczynski write that counting the 27 cases filed under Section 8(d) is questionable because
such cases should be categorized as “Securities Offering” actions since they pertain to misstatements in offering documents and do not involve accounting, auditing or reporting issues in Forms 10-K or 10-Q. In fact, an identical Section 8(d) action filed against Counseling International Inc. in fiscal 2013 was counted in that manner as part of the SEC’s “Securities Offering” category.
In addition, Flemmons and Wilczynski argue that 5 other actions listed in the “Issuer Reporting and Disclosure” category for FY 2014 are delinquent filing cases that belong in the separate “Delinquent Filings” classification. Excluding these 32 enforcement actions, the total of financial reporting cases in FY 2014 drops from 99 to 67 -- almost identical to the 66 cases in FY 2013 activity.