Earlier this year, the New York Times reported that the SEC was “bringin’ sexy back” to accounting investigations. That’s probably not good news for those auditing public companies.
In 2002, “accounting scandals” became a household phrase as the accounting frauds at Enron, WorldCom and others came to light. Although accounting fraud was nothing new, the public and political reactions to these scandals led to the passage of the Sarbanes-Oxley Act and the formation of the Public Company Accounting Oversight Board (PCAOB), as well as a significant increase in the number of SEC investigations.
In recent years, the number of SEC cases involving accounting fraud significantly decreased, which some have speculated demonstrates the effectiveness of Sarbanes-Oxley and the PCAOB, but the SEC apparently doesn’t think so. In the view of some at the SEC, the things that motivated accounting fraud have not changed, so the decreased number of accounting fraud cases has more to do with the SEC’s allocation of resources than a decrease in accounting fraud.
On July 2, 2013, the SEC announced that it was allocating fresh resources to the detection of accounting fraud through the formation of the Financial Reporting and Audit Task Force (Task Force).  Although still in its formative stages, the Task Force reportedly will involve the collaboration of six SEC accountants and six SEC attorneys from around the country who will be dedicated to identifying potential accounting frauds. Once a potential accounting fraud is identified, the Task Force will work with others in the SEC to pursue the investigation and develop cases.
Unofficial comments have suggested that time-honored areas of focus by the SEC will be heavy fodder for the Task Force, such as reserve decisions and revenue recognition. Restatements, as always, will be closely scrutinized. Potential independence violations and audit committee failures also will be of special interest to the Task Force.
Whether the actions of the Task Force will result in any “sexy” prosecutions, or even result in an increase in the number of investigations that become cases, remains to be seen. However, it seems clear that we should expect an increase in the number of investigations that are focused on potential accounting fraud, putting the auditors right in the crosshairs of the investigation. Even if an investigation is successfully navigated without any further action by the SEC, the experience likely will be harrowing and almost certainly expensive.
Be safe out there auditors, and very, very vigilant, because the Task Force is watching.