How the SEC is Tackling Financial Fraud

As the number of investigations into financial crisis cases continues to wane, the SEC is refocusing its efforts and resources into public company financial fraud. According to SEC Director of Enforcement Andrew Ceresney, financial reporting and audit fraud is the “next frontier” for enforcement actions.

New task force

The SEC formed a Financial Reporting and Audit Task Force in July 2013. And while the task force got off to a slow start, enforcement activity in this area has picked up recently. 

In August 2014, the SEC brought charges relating to a revenue recognition scheme against AirTouch Communications, Inc., a telecommunications equipment company, and two of its former executives. The SEC alleged that the company’s former CEO and CFO schemed to falsely inflate revenues by improperly recognizing as revenue more than $1 million worth of inventory that was shipped to a warehouse, but not actually sold.

In July 2014, the SEC brought charges against the CEO and former CFO of computer equipment company QSGI Inc., alleging the executives had violated the Sarbanes-Oxley Act. According to the SEC, the two falsely certified in a 2008 report that they had disclosed all significant internal control deficiencies. In fact, the CEO and former CFO failed to reveal inadequate inventory controls in certain company operations. They also concealed their participation in maneuvers to accelerate recognition of certain inventory and accounts receivable in the company’s books. The company filed for bankruptcy the following year.

Earlier in the year, the SEC charged CVS Caremark Corp. (CVS) with misleading investors about significant financial setbacks and using improper accounting to artificially boost its financial performance shortly before a $1.5 billion bond offering in 2009. The SEC alleged that the company had overstated its earnings by making improper accounting adjustments and failing to disclose those adjustments in its quarterly report filed with the SEC. According to the complaint, CVS improperly altered the accounting treatment of its acquisition of another drugstore chain. It reduced the value of $189 million of acquired personal property to zero and reversed $49 million in depreciation previously taken on those assets. 

Without admitting or denying wrongdoing, CVS settled the case for $20 million. And the company’s former retail controller, who allegedly orchestrated the accounting violations, agreed to pay a $75,000 penalty and to refrain from doing any accounting work for a public company for one year.

Be vigilant

In light of the SEC’s renewed focus, public companies and their executives should be particularly vigilant. Ensure that your financial statements are accurate and internal controls are strong.

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