By Jason S. Flemmons and Martin S. Wilczynski
Late last week, the Securities and Exchange Commission released its “Select SEC and Market Data” statistics for the fiscal year ended September 30, 2014. The numbers reflect a summary of the various enforcement cases brought by the SEC staff during the fiscal year, and they also provide insight into the types of actions and programmatic areas of emphasis as indicated by the actions brought during the period.
Jason S. Flemmons
At first blush, the fiscal 2014 data reflects an impressive 45% jump in cases relating to the “Issuer Reporting and Disclosure” area, showing that during the period, 99 actions were brought. This category has always been closely watched since it is the primary area in which accounting, auditing and financial fraud cases are summarized. The increase in this category for fiscal 2014 has already been cited in the press and media as a tangible indication that the SEC’s emphasis on accounting fraud and disclosure cases has taken root. Or has it?
The SEC ramped up its efforts to target accounting fraud beginning in July 2013 with the establishment of the Financial Reporting and Audit Task Force, led by David Woodcock and Margaret McGuire. The initiative has generally been considered to be successful, and by any account, the activity level in the accounting enforcement area has increased since the establishment of the task force. Combined with greater attention on the fundamental underpinnings of the financial reporting process, such as the integrity of registrant’s books and records and the effectiveness of its internal control environment, the SEC has greatly elevated the discussion of the importance of accurate reporting. The renewed focus in accounting and reporting cases has been a constant theme for the SEC enforcement staff in the recent past and is expected to continue into the foreseeable future.
Martin S. Wilczynski
But a closer look at the composition of the fiscal 2014 enforcement statistics shows that the increase in accounting activity may not have actually occurred just yet. Of the 99 actions comprising the activity in the “Issuer Reporting and Disclosure” category, a whopping 27 of the matters are “stop order” proceedings under Section 8(d) of the Securities Act, and 20 of those actions arose on the same day when the SEC instituted proceedings against a series of mining companies controlled by John Briner, a promoter who was the subject of a prior SEC action.
Although the Section 8(d) cases are important, their inclusion in the “Issuer Reporting and Disclosure” category of enforcement actions is questionable. These cases relate to matters in which the Commission seeks to suspend the effectiveness of a registration statement if there is reason to believe that it includes any untrue statement or omits to state any material fact considered necessary to make the statement not misleading. In substance, 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 to the 27 Section 8(d) cases in fiscal 2014, analysis shows that another 5 of the actions listed in the “Issuer Reporting and Disclosure” category are delinquent filing cases, which should be included in the separate “Delinquent Filings” classification, rather than in the “Issuer Reporting and Disclosure” category. Culling out these 32 matters, the activity in this category drops from 99 actions to 67 for fiscal 2014, a level which is nearly identical to the fiscal 2013 activity.
So the “increase” in accounting enforcement matters filed in fiscal 2014 may not be an increase after all. At least not yet. The case summary data for fiscal 2015 will likely show a well-deserved and more substantively accurate measure of the SEC staff’s focus and attention on this important area, and the resultant statistics at that time should validate the fruits of the SEC’s accounting and disclosure fraud initiatives. Time will tell.
Jason S. Flemmons and Martin S. Wilczynski are Senior Managing Directors in the FTI Consulting Forensic and Litigation segment.
