SEC Gets Busy With Accounting Investigations

SEC Gets Busy With Accounting Investigations

Number of Cases and Investigations Surges at Agency

One of the biggest sanctions involving a U.S. company was the $20 million paid last year by CVS Caremark to settle allegations of misconduct including improper acquisition-related accounting adjustments that boosted reported earnings in 2009. ASSOCIATED PRESS


Jan. 20, 2015 6:51 p.m. ET

The Securities and ExSEC Accounting Fraudchange Commission’s push to step up its policing of accounting fraud has led to a surge of cases and investigations, new agency figures show, as officials again target cooking-the-books offenses that were once a staple of its workload.

The upturn, the SEC’s first year-over-year increase in such enforcement actions since 2007, comes as the agency returns its focus to alleged financial-reporting and disclosure problems that might have gone unpunished as crisis-era misconduct, such as selling of flawed mortgage securities, dominated its attention in recent years.

But the new cases are on a smaller scale and typically involve conduct that is far less egregious than the accounting scandals of the early 2000s, such as the implosion of energy giant Enron Corp.

In addition, the agency’s computerized system for sniffing out accounting fraud has so far proved to be less revolutionary than many expected when it was unveiled in 2012.As part of a push initiated by SEC ChairmanMary Jo White , the agency filed 99 accounting-fraud enforcement actions in the fiscal year that ended Sept. 30, a 46% increase from its 68 actions the previous fiscal year, officials told The Wall Street Journal. New investigations were up about 30% from the previous year, the officials added, with the agency opening more than 100 probes targeting accounting fraud in the latest fiscal year.

Future numbers could rise higher still. A task force set up by the SEC in 2013 to hunt for hard-to-detect financial-reporting misconduct is set to deliver the first public fruits of its labor soon. Officials say the first cases developed by the task force are expected to be filed “within weeks.”


SEC investigators also expect further increases in cases and investigations once the frothy stock market subsides, since accounting fraud historically flourishes in such markets and often is exposed only after stock values turn lower.

The accounting cases in some respects are a return to the agency’s core function, after several years in which its resources were stretched in pursuit of possible wrongdoing involving toxic mortgages and complex loan deals. Yet none of the recent accounting-fraud cases have been blockbusters.

One of the biggest sanctions involving a U.S. company was the $20 million paid last year by CVS Caremark Corp. to settle allegations of misconduct including improper acquisition-related accounting adjustments that boosted reported earnings in 2009. The pharmacy operator didn’t admit or deny wrongdoing in the settlement, which didn’t require it to restate its earnings. A CVS spokeswoman didn’t respond to a request for comment for this article.

Other recent significant SEC accounting-fraud cases include an August case that Bank of America Corp. paid $20 million to resolve, as part of its $16.65 billion mortgage settlement with the government, in which BofA admitted failing to disclose uncertainties about potential higher costs related to mortgage-repurchase claims; and a January 2014 case in which Diamond Foods Inc. paid $5 million to settle charges it had boosted earnings by putting off recording some of its costs.

Diamond, which didn’t admit or deny any wrongdoing in agreeing to the settlement, didn’t respond to a request for comment. A spokesman for Bank of America declined to comment.

Standards at big companies have generally improved over the past decade or so as the Sarbanes-Oxley Act has forced companies to impose more effective internal controls over their financial reporting.

“The market is cleaner…it’s certainly not the Wild West that it was 10 years ago,” said John Carney, a former prosecutor and SEC attorney who is now a partner at law firm Baker & Hostetler LLP.

Andrew Ceresney, the SEC’s enforcement chief, said in an interview the escalating activity “doesn’t necessarily mean there’s more of this type of fraud.”

The SEC is putting more resources into pursuing accounting fraud, he said, and officials are now competing within the enforcement division to bring these types of cases: “People want to be first.”

No one type of misconduct is dominating the SEC investigations, officials say. Investigators are looking into a broad range of potential accounting fraud, including how companies book their revenue, whether they properly value their assets and obligations and whether they properly disclose information to investors.

Such cases can often turn on whether executives exercised reasonable judgment or knowingly tweaked their numbers, and so they can be harder to investigate and prove than outright thefts or fabrications.

Michael Maloney, chief accountant in the SEC’s enforcement division, said financial fraud is now “in many cases, harder to detect” than those earlier scandals, “but we do get there.”

One aid to that detection is the “Accounting Quality Model,” a computer program dubbed “RoboCop” by the media that number-crunches reams of companies’ financial statements looking for outliers and other red flags. Since it was announced with some fanfare in 2012, it has been extensively revised, according to SEC officials. They say the model was “always envisioned as a tool to identify companies we might focus on,” rather than some form of automated enforcement.

While “these kinds of tools are only going to get better,” ultimately, “human judgment” is always needed to bring actual cases, said David Woodcock, head of the SEC’s financial-reporting and audit task force.


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