SEC's New Focus on Accounting Fraud Raises Risks for Public Companies

The SEC is ramping up its enforcement efforts regarding accounting and disclosure fraud. On July 2, 2013, the agency announced its creation of a Financial Reporting and Audit Task Force consisting of enforcement attorneys and accountants from across the country dedicated to detecting fraudulent or improper financial reporting. This task force focuses on identifying and exploring areas susceptible to fraudulent financial reporting by various means, including reviewing financial restatements and revisions, analyzing performance trends by industry, and using technology-based tools such as the Accounting Quality Model. In an October 25, 2013, speech, SEC Commissioner Louis A. Aguilar expressed his support for the task force, and advocated various "get tough" policies recently implemented by the agency, including requiring defendants to admit liability as a condition of settlement.

In today's harsh regulatory climate, public companies and their officers and directors must react appropriately to the risks raised by accounting and disclosure problems. A "best practices" response typically entails appointing a special committee to investigate the alleged misconduct, and recommending appropriate remedial action which, in some situations, may include "self-reporting" to the SEC or other regulators. Experienced defense counsel familiar with the SEC's cooperation policies should be engaged at an early stage to minimize the consequences of these sensitive matters, which may ultimately lead to shareholder litigation. Companies may also wish to review the adequacy of their directors and officers insurance policies, particularly regarding coverage of pre-litigation investigations.