US securities regulator’s initiatives target fraud in financial reporting, auditing

Fraudulent financial reporting and auditing are among the targets of three new Division of Enforcement initiatives the US Securities and Exchange Commission (SEC) announced Tuesday in its efforts to detect and investigate fraud and misconduct that harm investors.

The new Financial Reporting and Audit Task Force will be dedicated to detecting fraudulent or improper financial reporting. The task force is designed to enhance ongoing enforcement efforts related to accounting and disclosure fraud.

The enforcement division also has formed the Microcap Fraud Task Force to target abusive trading and fraudulent conduct in securities issued by microcap companies, especially those that do not regularly publicly report their financial results.

In addition, the division has created the Center for Risk and Quantitative Analytics (CRQA). The CRQA will use data and analysis to profile high-risk behaviours and transactions. Its objective is to support initiatives to detect misconduct to help the Division of Enforcement investigate and prevent conduct that harms investors.

The initiatives signal an increasingly proactive approach to identifying fraud, said Andrew Ceresney, a co-director of the enforcement division.

“By directing resources, skill and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity,” Ceresney said in a news release.

The principal goal of the Financial Reporting and Audit Risk Task Force will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. That task force will expand enforcement efforts to identify fraudulent preparation of financial statements, issuer reporting and disclosure, and audit failures.

Enforcement lawyers and accountants from across the country will work to identify and explore areas susceptible to fraudulent financial reporting. They will conduct ongoing reviews of financial statement restatements and revisions. They also will analyse performance trends and use technology-based tools such as the Accounting Quality Model, a flexible modelling framework designed to help identify earnings management in financial reporting.

The Microcap Fraud Task Force will focus on microcap securities, which the SEC says often are associated with fraudulent promotional campaigns and manipulative trading strategies that take advantage of less sophisticated investors to amass ill-gotten gains. The task force will build on the work of the Microcap Fraud Working Group, which was created in 2010. The task force will not replace the working group, but it will consist of staff dedicated exclusively to investigating the microcap securities market.

The Division of Enforcement will use the CRQA as a resource to support and co-ordinate risk-identification, risk-assessment and data-analytic activities. The CRQA is designed to identify risks and threats that could harm investors, assisting staff nationwide in investigations and monitoring for signs of wrongdoing.

“The best investigative ideas usually come from the grass roots – staff in the field observing the market first-hand,” said George Canellos, co-director of the enforcement division. “A key objective of the Center for Risk and Quantitative Analytics will be to assist these staff members, bringing them analytical techniques and computing capacity with special expertise in data mining.”

Ken Tysiac ( is a CGMA Magazine senior editor.