David Woodcock and Margaret McGuire, SEC Financial Reporting and Audit Task Force
BY CHRIS GAETANO |Trusted Professional Staff
On July 2, the Securities and Exchange Commission (SEC) unveiled its Financial Reporting and Audit Task Force, a new initiative to detect fraudulent and improper financial reporting. Housed within the SEC’s Division of Enforcement, the task force will focus on fighting securities law violations related to the preparation of financial statements, issuer reporting, and disclosure and audit failures. While the SEC has always been keenly interested in accounting and financial statement fraud, the task force is designed to proactively detect this type of misconduct. According to Chair David Woodcock, the task force will consist of eight to 10 investigative accountants and attorneys, all “fueled by a shared mission to improve how we look at, understand, investigate and prosecute accounting fraud cases.” Woodcock, along with Vice Chair Margaret McGuire, recently spoke with The Trusted Professional about the SEC’s short- and long-term plans for the task force.
What motivated the SEC to form this task force?
WOODCOCK: Accounting fraud cases are the bread and butter of what we do at the agency. A lot of people are committed to this area, and that hasn’t changed and probably never will. What we want to do is bring additional resources to bear on financial reporting fraud. We want to make sure we’re doing all we can to detect it early. The goal, by having a national task force, is to bring together a lot of the initiatives already in progress across the agency and build upon those efforts. So, it’s really about concentrating resources in this area.
McGUIRE: In terms of staffing the task force and our expectations for the team, the term “thought leaders” comes to mind—it’s something David and I have been talking about. We’re looking to bring together a group of thought leaders in the Division and make sure their work and creativity are brought to bear in changing the way we look at financial reporting fraud, detect it and investigate it.
Where will these task force members come from? Within the division? Outside hires?
McGUIRE: The task force will draw its members from the Division of Enforcement, where we have, among our ranks, some of the most creative, experienced and skillful forensic accountants, GAAP [Generally Accepted Accounting Principles] accountants and investigative attorneys. We will be working closely with the Division’s Office of the Chief Accountant and our new Center for Risk and Quantitative Analytics, as well as coordinating with divisions and offices across the agency—for instance, the agency’s Office of the Chief Accountant and the Division of Corporation Finance. And we’ll continue to work closely with regulatory and law enforcement partners.
What are your immediate priorities?
WOODCOCK: Our group is going to be defined by several overarching goals. The first is to develop a state-of-the art methodology for identifying and investigating financial reporting fraud that we can share across the agency. While all of our goals are important, that will be our first effort from the outset. We will also be collaborating across the agency, as Margaret mentioned, and with regulatory and law enforcement partners like the Public Company Accounting Oversight Board (PCAOB), and interacting with the public, academia and other third parties to combat financial reporting fraud.
The SEC has said that the task force will focus on identifying and exploring areas susceptible to fraudulent financial reporting. What areas are you currently aware of, and what are the areas you expect to be looking at in the near future?
WOODCOCK: Speaking broadly, accounting and financial reporting fraud takes many forms, but it is fair to say that we see some of the same ones over and over. Without getting into the details too much, revenue recognition is always an issue. Asset and liability valuation is frequently an issue, as are accounts that allow for a lot of management discretion and for management to smooth earnings and accruals. Another area we’ll look at is non-GAAP measures, which vary by industry. I also think weaknesses in audit areas—such as, again, revenue recognition, debt equity issues, accounting estimates in related-party transactions—will always be important to look at.
McGUIRE: Some other areas are long-term contract accounting, lease accounting, pension liabilities. There are some financial statement areas that are more susceptible to fraud than others, and if we look across industries, certain accounting methods that, say five years ago, were preferred by certain industries now are gaining a broader audience and could be susceptible to fraudulent reporting. We will look at all of those areas.
I understand you plan to use technology-based tools such as the Accounting Quality Model, which has been described as a way for the SEC to facilitate comparison across firms within an industry and discern which financial statements “stick out from the pack.” What are some other ways you envision this task force leveraging technology in the fight against accounting fraud?
WOODCOCK: Computing costs have come down, computing power has gone up, and we have access at the agency to a tremendous amount of data that a lot of people don’t have access to, so we want to make sure we’re putting it to the best possible use. In addition to the Accounting Quality Model, we will leverage the information in our other internal databases, rely on publicly available databases, and also work with our Center for Risk and Quantitative Analytics, which uses modeling across industries and data sets. The idea, ultimately, will be to bring together all these resources into a dashboard for reporting companies that will allow us to determine which companies to investigate further.
Do you envision this task force taking a direct hand in enforcement, or more of an advisory role?
McGUIRE: It will be a combination of the two. Task force members will be involved in some preliminary investigative steps such as requesting documents, reviewing document productions and conducting interviews. But we expect the task force will remain focused on developing new and better methodology. We want to make sure they share their knowledge and expertise with people across the Division, but also that they maintain a focus on improving the methodology as a whole, which benefits the entire Division.
How big of a role will CPAs play in this task force? How can CPAs, in general, help with the mission of this task force?
McGUIRE: About half of the task force members will be accountants, half will be attorneys; but I think the bigger message for CPAs, for auditors and for audit committee members is about financial reporting itself. Perhaps the best weapons against financial reporting issues are a robust compliance program, an appropriately skeptical auditor, and a diligent and involved audit committee. Audit committee and auditor oversight are critical safeguards, particularly in areas that involve management judgment in the preparation of financial statements and disclosures.
Another message is about self-reporting and cooperation, which remain important for issuers, industry participants and auditors. Self-reporting has long been a key feature of our enforcement program, and the Division will continue to credit those issuers and auditors who police themselves and contact the staff early with prompt reporting.
Lastly, another important message to CPAs and auditors is that enforcement has a very effective cooperation program designed to encourage greater cooperation among individuals and companies that find themselves involved in an SEC investigation. We have a wide spectrum of tools that can facilitate and reward meaningful cooperation. The program is important because it gives enforcement staff access to high-quality, firsthand information and evidence, and that results in better investigations, stronger cases and a greater ability for the Division to stop financial reporting fraud and other types of fraud earlier.
WOODCOCK: In every case involving accounting fraud, we will ask where the auditors and the gatekeepers were. The CFO and accountant and audit committees are important; we view them as one of the first lines of defense against fraud, and will continue to do so.