SEC Intends to Shift Focus Back to Accounting Fraud

The Chairman of the Securities and Exchange Commission (“SEC”), Mary Jo White, is leading a charge to shift the agency’s civil enforcement action focus to accounting fraud, according to an article in the Wall Street Journal.  The article noted that from 2003 to 2005, such cases constituted more than 25 percent of the agency’s civil- enforcement actions; last year, accounting fraud and financial disclosure problems made up just 11 percent of SEC enforcement actions. 

As Scott Friestad, a senior SEC official, stated at a legal conference last month, “We have to be more proactive in looking for [accounting fraud].  There's a feeling internally that the issue hasn't gone away.” These types of actions often require the agency to rely heavily on whistleblowers at the targeted company to come forward with information about where, how, and under whose direction the fraud is occurring.  While the article describes software the SEC is developing which will help it analyze annual reports filed by companies to identify earnings manipulation and other fraud, complex financial fraud at large companies is often very difficult to detect without someone on the inside explaining what is going on.

This is why it is critical that, along with the renewed push by the SEC to focus on identifying cases of accounting fraud, courts and administrative judges continue to interpret the whistleblower protection provisions in the Sarbanes-Oxley Act and the Dodd-Frank Act in a broad manner.  This will be particularly important when the U.S. Supreme Court hears the case of Lawson v. FMR, LLC. A broad interpretation of SOX is necessary to create a culture in which employees of publicly traded companies feel free to expose fraud without fear of reprisal, which in turn leads to a corporate culture in which less fraud occurs.