Reporting Supervision and Enforcement

Overview

The Securities and Exchange Commission (SEC) is a federal government agency. Created by Congress in 1934 as the first federal regulator of U.S. securities markets, the mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust. It also monitors corporate merger and acquisition activity in the U.S.

A U.S. publicly-listed company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, must file reports with the SEC. These reporting requirements are meant to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.

A reporting company also has record keeping requirements, must implement internal accounting controls and is subject to the Sarbanes-Oxley Act of 2002, including the CEO/CFO certifications requirements, prohibition on officer and director loans, and independent auditor requirements. Under the CEO/CFO certification requirement, the CEO and CFO must personally certify the content of the reports filed with the SEC and the procedures established by the issuer to report disclosures and prepare financial statements.

All reports filed with the SEC are subject to SEC review and comment and, in fact, the Sarbanes-Oxley Act requires the SEC undertake some level of review of every reporting company at least once every three years.

SEC Financial Reporting and Audit Task Force (FRAud)

In July 2013, the SEC announced the establishment of a Financial Reporting and Audit Task Force to concentrate on expanding and strengthening the Division's efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. The principal goal of the Task Force is fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. The Task Force focuses on identifying and exploring areas susceptible to fraudulent financial reporting, including on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model, and related tools, which uses data analytics to assess the degree to which a company’s financial statement appears anomalous.

In contrast to the former SEC accounting fraud task force, which was created in the wake of the Enron accounting scandal to handle volume and conduct investigations, and is composed of senior-level officials from several Federal agencies, the Financial Reporting and Audit Task Force takes a more novel approach, seeking to generate and refer cases of financial reporting fraud at an earlier stage than in the past. The Task Force’s mission is to identify matters and issues early, conduct enough of an investigation or inquiry to develop a viable enforcement theory, and then refer the matter to front-line Enforcement staff. Once the Task Force refers a matter to Enforcement, it maintains only an advisory and resource role.

Regulation

Although the FRAud Task Force is still relatively new, the SEC has made it clear that it will aggressively pursue individuals in finance and accounting gatekeeper roles, both within publicly traded companies as well as those acting as external consultants to those companies. The SEC is focused on the existence and maintenance of proper internal controls mechanisms surrounding financial reporting and accounting functions.

 

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