SEC Enforcement Director Reports Progress in Financial Reporting and Disclosure
SEC Enforcement Division Director Andrew Ceresney provided an overview of the Division's work on issuer reporting and disclosure. In a speech given at the 2016 Annual Corporate Director's Forum Conference, he discussed the changing context and complexity of violations and enforcement actions over time. He described the ways in which the SEC evolved in order to pursue deficiencies in financial reporting - the accuracy and reliability of which, he said, comprise the "bedrock" of the financial markets.
Director Ceresney noted that the SEC focus on financial reporting is "nothing new." It is a response to (i) significant pressure to meet earning and performance expectations, (ii) prioritized focus on short-term performance and not on long-term success, (iii) poor oversight in units and subsidiaries, (iv) growth that outpaces reporting and accounting infrastructure, and (v) management's questionable "tone at the top" and overreliance on process.
Director Ceresney highlighted current areas of concern including: (i) revenue recognition, (ii) asset valuation, (iii) earning management, (iv) missing or incomplete disclosures and (v) weak accounting controls.
Director Ceresney reported progress in reliable financial reporting due to the changing regulatory landscape and to certain SEC enforcement cases. He explained that boards, management and auditors are now "much more focused on the risks involved in preparation of financial statements and of the mitigants necessary to control these risks."
Director Ceresney discussed a number of the enforcement actions that the SEC brought against corporate board members and accountants who had failed to fulfill their obligations. He said that audit committee members must understand that any time they encounter information suggesting problems with company filings, they must "take concrete steps to learn all relevant facts and cease annual and quarterly filings" until they are satisfied with the accuracy of the filing.
Regarding audit firms, Director Ceresney stated that "engagement partners need to be actively monitored to ensure that they are fully capable of fulfilling their critical role as gatekeepers." He suggested that overseeing audit engagement partners was not a task for audit firms alone. "Board members shall keep a close eye on the procedures that [audit] firms employ to monitor their partners' work," he said.
Director Ceresney outlined the ways in which the SEC will remain proactive, such as continuing its programs for cooperation with whistleblowers (whom he described as "indispensable"). Further, he noted ongoing internal coordination through the Corporate Issuer Risk Assessment program and the Financial Reporting and Audit Group, which help the SEC to "glean valuable information" regarding potential financial frauds from company insiders. Director Ceresney stressed the importance of "gatekeepers" (particularly external auditors and members of the audit committee) in ensuring that issuers make timely, comprehensive and accurate disclosures. He cautioned that gatekeepers' status will not exempt violations of their own responsibilities from the SEC's enforcement.
Commentary
Director Ceresney’s comments at this week’s Directors Forum 2016 illustrate the SEC’s recent emphasis on issuer reporting and disclosure cases, and its willingness to bring enforcement actions against outside auditors, audit committee members, and directors who fail to serve as adequate “gatekeepers” of the financial reporting process. By citing recent enforcement actions against external auditors BDO USA LLP and Grant Thornton LLP, as well as actions against individual audit committee members, Director Ceresney made the point loud and clear that auditors – including the external engagement partner and the audit committee members tasked with overseeing their efforts – are obligated to take rigorous action upon identifying red flags that could impact the reliability of an issuer’s public financial statements. His statements were also indicative of new tactics being employed by the SEC to identify potential enforcement actions against issuers, including an increased reliance on data analytics and developing leads through tips provided by the Office of the Whistleblower. This is a continued reminder that audit committee and board members cannot simply act as a rubber stamp, and must be diligent and actively involved in the financial reporting process and take concrete action when potential issues are identified.