SEC's New Model Profiles Companies For Accounting Fraud
Last November, Forbes magazine detailed how a stretched Securities & Exchange Commission, embarrassed at having missed Bernie Madoff’s $65 billion Ponzi scheme, had “reorganized its enforcement division, eliminating an accounting-fraud task force and adding new units to pursue crooked investment advisors and asset managers, market manipulations and violations of the Foreign Corrupt Practices Act.”
In April, former federal prosecutor Mary Jo White was sworn in as chairman of the SEC and quickly made clear there would be a renewed emphasis at the agency on detecting and punishing accounting shenanigans. In July, the agency announced formation of a new Financial Reporting and Audit Task Force which would, among other things, be using a new Accounting Quality Model (AQM).
Broadly speaking, the AQM is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM and the introduction of new initiatives announced July 2, 2013, indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit.
Avoiding an SEC audit under the AQM means companies should be sure to:
- “Check your work.”
- Adopt Accounting Polices Similar to Those in Your Industry Peer Group.
- Stick With One Auditor.
- Reduce Off-Balance Sheet Transactions.
- Conservative Decision-Making Regarding Discretionary Accruals.
- Be Prepared to Respond to SEC Inquiries.