The co-directors answered questions about the Enforcement Division’s recent activities at this year’s conference, which was titled, "Strategies for the Profession in an Era of Heightened Enforcement."
In keynote remarks at this year’s ALI-CLE Accountant’s Liability Conference in Washington, D.C., Stephanie Avakian and Steve Peikin, co-directors of the SEC’s Enforcement Division, addressed the latest developments at the SEC on matters relating to accounting and auditing, including insights on how to gain cooperation credit with the Commission and effective strategies for counsel when meeting with staff during Wells meetings.
Firm versus individual. Describing the decision on whether to charge a firm for accounting rule violations, as opposed to charging individuals, as "more of an art than a science," Peikin said the Division takes into account a number of factors, including how long the misconduct was going on and how much harm resulted from the conduct. The SEC will also take into account if the firm had the opportunity to detect and stop the misconduct, he said.
Avakian added that cases in which the SEC has brought charges at the firm level have some common threads, including if there was involvement by the firm’s national office. Another common thread is the existence of red flags that should have been detected by senior management, she advised.
Remedies and cooperation. On the issue of remediation, as well as self-reporting and cooperation, Peikin recommended reading the SEC’s recent order against PPG Industries, which had been charged with making fraudulent misrepresentations in its financial statements. In that case, a senior accounting officer had directed employees to manipulate accounting entries in order to hit analysts’ earnings estimates. Upon learning of the improper conduct, PPG promptly self-reported to the Commission and undertook immediate remedial measures. Due to its "extensive cooperation" with Commission staff, the SEC did not impose a penalty on PPG.
Avakian noted that there are other remedies beyond financial penalties at the Commission’s disposal, such as injunctions and undertakings. When asked about the staff’s thought process when deciding to bring an action in federal court or as an administrative proceeding, Avakian stated that some remedies may only be sought administratively, such as violations of Rule 102(e) regarding improper professional conduct. These administrative proceedings result in a suspension or bar against appearing or practicing before the Commission.
Investigations. Peiken said that when initiating investigations, information can come from many sources, including whistleblowers, self-reporting, media reports, and referrals from other divisions or law enforcement agencies.
The co-directors also discussed how to approach the Wells submission process and what to do at a subsequent Wells meeting. There is no formula for a successful Wells meeting, Peiken advised, but participants should always be prepared. What doesn’t work, he cautioned, is showing up to a Wells meeting with a bulleted PowerPoint presentation of the Wells submission that the staff has already read. Short meetings tend to be the most effective, according to Peikin.
Avakian said that one effective approach counsel may take during a Wells meeting is describing how a case will look like before a jury. She also recommended that counsel be prepared to have a dialogue with the staff and not simply deliver a speech. There is no need to go into every single element of your argument, Peiken added, noting that the staff does not need to be educated on all elements of Rule 10b-5. It is much more effective to narrow it down to a particular issue such as materiality or scienter, he advised.
Fraud Task Force? The co-directors were asked if the Financial Reporting and Audit Task Force, which was created in 2013 to help detect fraudulent or improper financial reporting, was still active. Avakian assured that the Task Force still exists and assists the staff in a number of places, including data analytics and supporting the staff on open cases.
MainStory: TopStory AccountingAuditing Enforcement
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