ROBOCOPS, WHISTLEBLOWERS AND THE NEW SEC TASK FORCE

Transcription

1 ROBOCOPS, WHISTLEBLOWERS AND THE NEW SEC TASK FORCE WHAT PUBLIC COMPANIES NEED TO KNOW ABOUT SEC ENFORCEMENT AND FINANCIAL REPORTING IN 2014 *This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

2 Introductions Moderator Christine Besnard, Executive VP, General Counsel and Secretary, MFLEX Panelists Howard Scheck, Partner, Advisory Services, Former SEC Division of Enforcement Chief Accountant, KPMG LLP, Washington, DC Jerry Arnold, NERA Economic Consulting, Leventhal School of Accounting, Marshall School of Business, University of Southern California, Los Angeles Nick Morgan, Partner, DLA Piper, Los Angeles 2

3 Agenda SEC enforcement trends SEC s emerging tools and tactics Hot enforcement topics in financial reporting Other highlighted financial reporting topics Possibility of SEC overreach? Best practices for 2014 Questions and discussion 3

4 Declining financial fraud/disclosure cases Source: U.S. Securities and Exchange Commission. 4

5 New SEC tools and tactics Dodd-Frank Whistleblower Bounty Program Financial Reporting and Audit Task Force Accounting Quality Model, a/k/a Robocop 5

6 SEC Whistleblower Program Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC may pay rewards to individuals who provide the SEC with information about a possible violation of the federal securities laws. The SEC may provide monetary compensation to individuals who voluntarily provide original information (i.e., previously unknown to the SEC) leading to a successful SEC enforcement action resulting in sanctions exceeding US$1 million. The individuals may receive between 10 and 30 percent of the amount collected in the SEC action or a related action brought by certain other agencies. 6

7 Whistleblower awards In August 2012, the SEC issued its first award to a whistleblower who received nearly US$50,000, which was 30% of the amount collected in an SEC enforcement action against the perpetrators of a securities scheme. In June 2013, the SEC issued an order awarding three unnamed whistleblowers 5% each of the funds that it ultimately collects from an action against a hedge fund and its principal. On October 1, the SEC issued an order awarding US$14 million, the largest award yet. 7

8 Whistleblower tips by type: 2012 v Source: US Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year

9 Financial Reporting and Audit Task Force An expert group of attorneys and accountants dedicated to detecting fraudulent or improper financial reporting and disclosures and audit failures What will the Task Force do? What are the areas of focus? What are possible implementation issues? 9

10 Accounting Quality Model: Robocop AQM is an automated analytical tool AQM attempts to detect earnings management by looking for: risk indicators (factors that are directly associated with earnings management) or risk inducers (strong incentives for earnings management) What does AQM do? How will the SEC use AQM? What are potential issues? 10

11 Accounting Quality Model: Robocop Top Robocop risk indicators and risk inducers include: an accounting policy that results in relatively high book earnings, even though firms simultaneously select alternative tax treatments that minimize taxable income a high proportion of transactions structured as off-balance sheet frequent conflicts with independent auditors changes in auditors filing delays decreasing market share lower profitability margins use of words and phrasing choices in MD&A that have been common amongst fraudulent filers in the past 11

12 Hot enforcement topics in financial reporting Segment reporting: Paccar, Sony, Caterpillar Staff notes that they are serious about segment reporting How operating segments are aggregated and historical results are portrayed Assignment of goodwill from prior acquisition to appropriate segments Topic 280 of FASB s Accounting Standards Codification Internal controls: Paccar, JPMorgan Chase & Co Diamond Foods Enforcement forecast 12

13 Other highlighted topics in financial reporting R&D expenses for significant projects Costs incurred by project Nature of efforts and risks involved in completing Resources needed if current liquidity is not adequate for completion Income tax Rate reconciliation Valuation allowance for deferred tax assets 13

14 Other highlighted topics in financial reporting Pensions and other post-retirement benefits Disclosures regarding expected return on assets (EROA) and discount rates Goodwill Insights on components of newly acquired goodwill if not obvious. For example, expected synergies Information on impairments to goodwill. For example, why now? in terms of changes in circumstances 14

15 Risk of SEC overreach? SEC v. Kovzan Fraud action alleging that CFO failed to disclose US$1.8 million in perquisites to the company s former CEO SEC alleged that the CFO knew or was reckless in not knowing that the perquisites were not disclosed accurately Kansas jury found for the CFO on all 12 charges (and found in his favor on every question on the jury verdict form) SEC v. Jensen Fraud action against former CEO and CFO alleging company prematurely recognized revenue in six transactions, improperly inflating its financial results in 2006 and 2007 Court concluded that while there were accounting errors, there was no fraud or statutory violation 15

16 Takeaways for 2014 Task Force Chair David Woodcock: Best weapons against financial reporting fraud, particularly in areas involving significant judgment Robust compliance programs Appropriately skeptical auditor Diligent audit committee 16

17 Questions? Moderator Christine Besnard, Executive VP, General Counsel and Secretary, MFLEX Panelists Howard Scheck, Partner, Advisory Services, Former SEC Division of Enforcement Chief Accountant, KPMG LLP, Washington, DC Jerry Arnold, NERA Economic Consulting, Leventhal School of Accounting, Marshall School of Business, University of Southern California, Los Angeles Nick Morgan, Partner, DLA Piper, Los Angeles 17