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By Susan Bokermann
April 17 — There has been a real interest at the senior level of the SEC to bring enforcement cases on securities law violations stemming from false or misleading financial statements and disclosures, said David Woodcock, director of the Securities and Exchange Commission's Fort Worth, Texas, regional office.
Woodcock spoke on a panel focusing on financial accounting cases brought by the SEC during the American Bar Association's Business Law Section spring meeting in San Francisco, April 17.
One way in which the SEC has realized its interest in investigating financial fraud is through the Financial Reporting and Audit Task Force, created in June 2013.
Since then, SEC officials—including SEC Chairman Mary Jo White—said the agency has seen a significant increase in its financial fraud actions.
However, there have been complaints that the task force is ineffective because it doesn't bring enough cases. “Don't poke the bear,” said Peter Chan, partner at Morgan, Lewis & Bockius. “You don't want tell the task force that they aren't doing enough.”
However, Woodcock said that it takes years to investigate a financial accounting fraud case, and as such the task force has only brought one case to date.
Woodcock said the purpose of the task force is to identify matters that the SEC should be investigating. He said that the majority of cases are on the SEC radar, but there isn't enough information to pass them along to an enforcement group. He said in those situations, “[the task force] incubates them.”
Woodcock said that this means the task force investigates the potential issue, which usually begins with simply calling the appropriate person in the company and asking questions. He said that in his opinion, the long term goal of the task force is “identifying issues before they get bigger.”
As such, Woodcock said it's important that companies cooperate with these investigations. He said the task force will be “very upfront” with companies and specific about what information they are seeking.
The “good side,” said Chan, is that if a company is forthcoming about giving information, it can avoid a “full-blown investigation.”
When you are conducting an investigation, you are looking for “the breakdown in the system,” said Catherine de Madrid, partner at Ernst & Young. Sometimes, this is a result of absent or unfollowed internal controls.
Madrid used phishing scams as examples of situations where a company might have some internal controls in place to make sure that funds aren't wired out of the company to unknown vendors, but there may not be a process in place for wiring funds to an old vendor with a new account number, and thus the company might fall victim to a phishing scam.
Chan also noted that sometimes internal controls are good on paper, but not necessarily followed. He used the example of a CEO who uses company funds for personal use. Others in the company may have knowledge of the inappropriate behavior, but say nothing because of the CEO's status in the company.
“The dominant CEO idea is a problem,” said Woodcock, because nobody questions him—not even the board. “The whole point of having internal controls is that you prevent fraud before it happens,” he said.
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