On July 2, 2013, the U.S. Securities and Exchange Commission ("SEC") announced the creation of two new task forces and a new analytics center that will likely lead to an increased number of investigations in matters related to potential accounting fraud and fraud in microcap stock trading. These initiatives reflect new SEC Chairman Mary Jo White's desire to refocus on accounting fraud and to commit more rigorous attention to microcap stack trading, while employing innovative strategies and new technologies to aid the staff in fraud detection and case building.
Financial Reporting and Audit Task Force
The SEC’s new Financial Reporting and Audit Task Force will focus on potential violations related to the preparation of financial statements, issuer reporting and disclosures, and audit failures. This task force will conduct an on-going review of financial statement restatements and revisions, analyze industry performance trends, and use risk-based analytical tools such as the Accounting Quality Model, which assesses the degree to which registrants’ financial statements appear anomalous. The task force will also use software that analyzes the "management’s discussion and analysis" section of annual reports, where executives detail their companies’ performance and prospects.
The SEC created this task force to reverse the downward trend in the number of investigations related to accounting fraud and disclosures. In fiscal year 2012, there were 79 cases at the SEC involving accounting fraud (or approximately 11 percent of SEC enforcement actions), the fewest number of accounting fraud cases since at least 2003. From 2003 to 2005, approximately 25 percent of civil-enforcement actions filed by the SEC were related to accounting fraud and financial disclosure issues.
The creation of this task force follows recent statements by Chairman White, who said, "I think financial-statement fraud, accounting fraud has always been important to the SEC. It’s certainly an area that I’m interested in, and you’re going to see more targeted resources in that area going forward."1
Microcap Fraud Task Force
The SEC’s new Microcap Fraud Task Force will focus on potential fraud related to the issuance, marketing, and trading of microcap securities, especially the securities of companies that do not publicly report their financial results on a regular basis. Among other things, this task force will investigate the use of websites and social media by stock promoters.
Microcap stock trading has already been a focal point for the SEC to some degree. In 2010, the SEC created a Microcap Fraud Working Group. Last month, the SEC suspended trading in the securities of 61 purported shell companies that were delinquent in their public filings and seemingly no longer in business, based on analysis done by the Microcap Fraud Working Group. This new task force will not replace the Microcap Fraud Working Group, but it will instead focus exclusively on participants in the microcap stock market, such as attorneys, auditors, broker-dealers, transfer agents and other "gatekeepers," as well as traders, stock promoters and purveyors of shell companies.
Center for Risk and Quantitative Analytics
The SEC also created a Center for Risk and Quantitative Analytics to support and coordinate the SEC’s risk identification and assessment, as well as its data analytic activities on a national level.