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SEC Announces New Task Force To Root Out Financial Reporting Fraud

Friday, July 5, 2013
The Securities and Exchange Commission July 2 announced three new enforcement initiatives, including a task force aimed at rooting out potential fraud involving issuer disclosures and audit failures.

In a release, the SEC said its Financial Reporting and Audit Task Force will expand the Enforcement Division's efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosures, and audit failures.

In addition, the SEC announced a Microcap Fraud Task Force, and a new Center for Risk and Quantitative Analytics.

'High-Impact Areas.'
“By directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity,” division co-director Andrew Ceresney said in the release.

Ceresney and division co-director George Canellos are reviewing the division's organizational and operational aspects, including its specialized units. Canellos had suggested the set up of the financial reporting and microcap initiatives in prior remarks, noting that more proactive approaches are needed in those areas (117 SLD, 6/18/13).

Financial fraud--a former bastion of SEC enforcement activities--frequently is detected through issuer restatements, which have declined in recent years through the quality controls instituted by the 2002 Sarbanes-Oxley Act (104 SLD, 5/30/13). SEC Chairman Mary Jo White recently said the SEC will put “more targeted resources” into pursuing accounting and financial fraud (121 SLD, 6/24/13).

Fraud Identification
According to the SEC release, the financial reporting task force will focus on identifying and exploring areas that may be susceptible to fraudulent financial reporting. Among other activities, it will review financial statement restatements and revisions, analyze industry performance trends, and use risk-based analytical tools such as the Accounting Quality Model, which identifies financial statement outliers.

The task force will include enforcement attorneys and accountants from across the country, and collaborate closely with the division's Office of the Chief Accountant, the SEC Office of the Chief Accountant, the Division of Corporation Finance, and the Division of Economic and Risk Analysis, the SEC said. The task force will be chaired by David Woodcock, director of the SEC's Fort Worth Regional Office, while Margaret McGuire, senior counsel to the directors, will serve as vice chair.

The microcap task force will focus on fraud in the issuance, marketing, and trading of microcap securities, the SEC said. Among other objectives, the task force will develop and implement strategies in the detection and fight against microcap fraud, especially by focusing on “gatekeepers” such as attorneys, auditors, and broker-dealers, and other significant participants, such as stock promoters.

The task force will be led by Elisha Frank, assistant director of the Miami Regional Office, and Michael Paley, assistant director of the New York Regional Office.

Risk Center
In the meantime, the Center for Risk and Quantitative Analytics will support and coordinate the division's risk identification and assessment, and data analytic activities, the SEC said.

“The best investigative ideas usually come from the grass roots-staff in the field observing the market first-hand,” Canellos said in the release. “A key objective of the Center for Risk and Quantitative Analytics will be to assist these staff members, bringing them analytical techniques and computing capacity with special expertise in data mining, and help them translate their valuable ideas into timely, thoughtful, and targeted investigations of national scope.”

The center will be led by Lori Walsh, the former deputy chief of the division's Office of Market Intelligence.

The SEC's announcement is available at

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