Be Forewarned – SEC Enforcement Priorities
By George Wilson
In recent months SEC enforcement cases related to public company reporting have focused on a number of key themes, including financial reporting fraud, cybersecurity and perks disclosures. It is clear the Enforcement Division is sending messages with these cases, and it is important for us as reporting professionals to understand these messages. To help in that process, here are recent cases focused on each of these themes.
Cases focused on financial reporting fraud include:
Cases focused on cybersecurity and related disclosures include:
Cases focused on perks disclosures include:
The Enforcement Division’s 2020 Annual Report reinforces these themes. The very first section of the main body of the report is titled “Focus on Financial Fraud and Issuer Disclosure”:
Integrity and accuracy in financial statements and issuer disclosures are critical to the functioning of our capital markets. During the last fiscal year, the Division maintained its ongoing focus on identifying and investigating securities laws violations involving different components of the financial reporting process.
In addition to traditional case sources, the Division took a proactive, risk-based analytic approach to identifying potential violations, which resulted in several important actions. For example, the Division’s EPS (Earnings Per Share) Initiative uses risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices to mask unexpectedly weak performances. Investigations under the EPS Initiative resulted in settled actions against Interface Inc. and two of its former executives, and against Fulton Financial Corporation, for improper accounting practices that resulted in the reporting of quarterly EPS that met or exceeded analyst consensus estimates. The Division also used risk-based data analytics to uncover potential violations related to corporate perquisites, which led to a settled enforcement action against Hilton Worldwide Holdings Inc. for failing to fully disclose perquisites and personal benefits provided to executive officers.
Many of the cases above name individuals. The Enforcement Division’s Annual Report includes a section titled “Individual Accountability”:
Holding individuals accountable is among the Commission’s most effective methods of achieving deterrence. Experience teaches that individual accountability drives behavior and can also broadly impact corporate culture. In Fiscal Year 2020, 72% of the Commission’s standalone actions involved charges against one or more individuals. This percentage is in line with the results of the last several fiscal years. The individuals charged in our actions include those at the top of the corporate hierarchy—including chief executive officers, chief financial officers, and chief operating officers—as well as gatekeepers like accountants, auditors, and attorneys.
The message in the volume of these cases is clear and all of us involved in the preparation and auditing of public company reports should listen carefully.
As always, your thoughts and comments are welcome!