Top SEC Concerns in Public Company Financial Reporting to Watch in 2017
More than three years ago, the Securities and Exchange Commission (SEC) announced the formation of the Financial Reporting and Audit Task Force—a group within the SEC Enforcement Division designated to identify fraudulent or improper financial reporting, using “cutting-edge technology and analytical capacity.” Fast forward to the start of 2016, when the SEC's Director of Enforcement highlighted the importance of policing financial reporting issues with newer data-driven tools. This included the Corporate Issuer Risk Assessment program, which was designed to detect “anomalous patterns in financial statements that may warrant additional inquiry.”
Coupling the SEC's new tools with its increasing bounties to whistle-blowers—totaling more than $100 million in 2016 alone—it should come as no surprise that SEC actions against public company related defendants hit an all-time high of 92 actions in fiscal year 2016, up from 84 actions in 2015 and prior years averaging between 40 and 50 cases annually. Closer examination of some of these cases reveals an SEC enforcement program focused on bread-and-butter issues, such as earnings management and disclosure failures. It also suggests some surprising areas that public company in-house counsel and finance teams should watch for in 2017 and beyond.
Broadly, the SEC's trend toward stricter and more active enforcement, and the types of cases they brought forth in 2016, underscore the strategic importance of ensuring strong teams across legal and accounting. It is paramount that in-house attorneys and accountants, and their third-party advisers, understand how to deal with regulators and manage internal processes to simultaneously avoid and prepare for investigations.