A few months ago, I voiced my opinion about how it would be great to have a forensic accountant as an option to run the Securities and Exchange Commission (SEC). I can’t deny it, it’s right here, written in Internet stone. The reason I spoke about it was that a new head of the SEC had just been announced and, yet again, it was a lawyer. I believed that having a CPA, credentialed in financial forensics, might shake things up or at least lead the SEC to think of new ways and methods to protect investors. I still believe that a qualified forensic accountant would make an excellent candidate, but it seems that, in the case of Mary Jo White, the new head of the SEC, I may have been haste in my criticisms.
When he nominated Mary Jo White to head the SEC, President Obama said, “You don’t want to mess with Mary Jo”. Apparently it wasn’t just talk. Mary Jo White has said, in an interview, “I think financial statement fraud has always been important to the SEC”, and that she has committed substantial resources to the detection and investigation of fraud in accounting and financial disclosures seems to back that statement. On 2 July, the SEC announced three new Division of Enforcement initiatives; the Financial Reporting and Audit Task Force (FRATF), the Microcap Fraud Task Force (MFTF) and the Center for Risk and Quantitative Analytics (CRQA). These are fancy sounding names, for sure, but what are they and why are they encouraging with respect to the SEC’s goals?
First, the FRATF’s focus is detecting and investigating fraudulent or improper financial reporting and engaging in enforcement actions related to accounting and disclosure fraud. The MFTF’s goal is to target abusive trading and fraudulent behavior in securities issues by microcap companies. Microcap means that the company’s market capitalization, which is the share price multiplied by the number of outstanding shares of that company, is between $50 and $300 million. This task force will pay particular attention to microcap companies that do not regularly issue public financial results, since the lack of regular publicly available reports means that potential investors have limited access to information about the company. This, in turn, increases the risk that the investors may be fed fraudulent information that they cannot sufficiently verify. Finally, the CRQA will, as its title suggests, specialize quantitative data and analytics. This is the high-tech innovation of the SEC. Here the SEC will work to identify risks and potential threats to investors, be a part, along with other agencies, of risk-based investigations and come up with ways to identify possible illegality. The CRQA will employ various data technologies to achieve this goal. Of course, the usefulness of quantitative data analytics is only as good as those who use it. There is a lot of data out there but you need to know how to work with it in order to get the information that you are looking for.
What is encouraging about the announcement of the initiatives is not only that the SEC has declared a focus on the proactive detection and investigation of possible fraud, it is also not just that the SEC is stepping up its use of technology and data analytics in its endeavors, it is in large part about the manpower that they say they are going to employ for these initiatives. The SEC has announced that they will include enforcement attorneys and accountants, which is a great idea. The successful pursuit of financial fraud requires the expertise of people who know the books and people who know the law. In particular, the collaboration of attorneys and forensic accountants can lead to a formidable fraud fighting force. Certified forensic CPAs not only understand financial records, they also know how to look for potential fraud in those financial records and this information must be of a standard suitable for a court of law. Working with attorneys, the forensic accountant can put together information and provide appropriate litigation services in cases that the SEC decides to pursue.
Yes, it is true; I did voice my dissenting opinion about the appointment of another in a long line of attorneys to head the SEC. I have not changed my mind that a well-credentialed forensic CPA would be a wonderful choice for this position. However, I do concede that it is apparent that Mary Jo White understands the importance of both legal and financial expertise when it comes to policing the financial markets. Vital roles are played by all parties in the investigation and prosecution of financial crime and in the protection of investors. So, as these initiatives go into action and work towards achieving their stated goals, I shall eat at least some of my words. As long as fewer parties are getting away with their financial misdeeds, I shall enjoy every mouthful.