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SEC Looks to Renew Focus on Accounting Fraud

By John A. Goldmark
July 2016
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The SEC recently emphasized its intent to renew enforcement efforts on accounting fraud cases, and advised company executives to prioritize strong internal controls. Following the 2008 financial crisis, SEC enforcement of accounting fraud took a back seat to inquiries and enforcement actions involving the perceived causes of the meltdown. In recent years, however, the SEC has returned its attention to financial reporting fraud—its traditional bread and butter.

In remarks last month, the head of the SEC’s New York office, Andrew Calamari, highlighted that the SEC’s financial reporting cases have more than doubled in the last two years, and emphasized that these cases will remain “one of the core pieces of the [SEC’s] enforcement program.”  Mr. Calamari noted that problems with a company’s internal controls often underlie accounting fraud cases, and stated that he expects the SEC to continue to focus on enforcement in this area. According to Mr. Calamari, “The message of these cases is that senior leadership should place strong emphasis on the importance of designing and implementing strong internal controls, and what is needed is not just involvement from senior leadership but also from the auditing community.”

The SEC reportedly has improved capabilities to gather and analyze large amounts of data to identify accounting issues, including a Corporate Issuer Risk Assessment (CIRA) tool, and aims to use these tools to quickly review and identify red flags for suspicious reporting.

The SEC’s focus puts added importance on a company’s financial reporting gatekeepers, including audit committee members and external auditors, and implementing internal controls to investigate situations suggesting material inaccuracies in financial reporting.

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