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SEC Prioritizes Prosecution of Issuer Reporting and Disclosure Abuses

By Jordan A. Clark
May 2016
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On Jan. 25, 2016, Director of Enforcement Andrew Ceresney gave the keynote address at the SEC Director’s Forum. Mr. Ceresney’s address touched on three issues: 1) the SEC’s continued prioritization of enforcement work in the area of issuer reporting and disclosure; 2) the SEC’s renewed focus on gatekeeper enforcement; and 3) the SEC’s new methods for detection of financial misconduct.

First, Mr. Ceresney explained that the pursuit of issuer reporting and disclosure abuses will remain a top priority for the SEC. He grouped the SEC’s enforcement priorities into six categories, with corresponding examples of recent enforcement issues:

  • Revenue Recognition
    • Sham revenue transactions, invalid bill and holds, and abuses of specialized accounting methods.
  • Valuation and Impairment Issues
    • Failure to incorporate risk in valuation of portfolios and improper accounting of financial assets.
  • Earnings Management
    • Fraudulent manipulation of a company’s financial results to meet analyst expectations and listing fake residents to avoid breaching a covenant in a lease to operate certain facilities.
  • Missing or Insufficient Disclosure
    • Failure to report executive perks as compensation and concealment of financial impact of student loan program.
  • Internal Accounting Controls
    • Violations of internal accounting control provisions of the federal securities laws, even in the absence of fraud charges.
  • Clawback of Bonuses and Incentive-Based Compensation
    • Compensation clawbacks where executives engaged in financial reporting misconduct, even where the executives have not been formally charged.

Second, Mr. Ceresney emphasized the SEC’s continued focus on holding gatekeepers accountable for financial misconduct. He explained that the SEC will not prosecute audit committee members and external auditors who make good faith judgments that ultimately prove to be flawed. Rather, the SEC will target gatekeepers who fail to reasonably carry out their diligence responsibilities and who unreasonably fail to comply with relevant auditing standards. Mr. Ceresney advised that audit committee members who learn of inaccurate company filings must take concrete steps to correct the problem and that board members should pay close attention to auditors’ work to ensure compliance and accuracy.

Third, Mr. Ceresney focused on the SEC’s early detection methods. The SEC continues to base the majority of its insider trading actions on referrals from the Financial Industry Regulatory Authority (“FINRA”). The SEC also develops leads through its whistleblower and cooperation programs. However, the newest development in early detection is the SEC’s in-house Corporate Issuer Risk Assessment program (“CIRA”). CIRA is an analytical tool that helps the SEC detect anomalous patterns in financial statements. The program allows SEC staff to compare specific companies to its peers in order to detect abnormal results. The SEC has pursued five actions based upon CIRA, and Mr. Ceresney believes more actions will follow. 

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