The Securities and Exchange Commission is establishing a new enforcement unit focused on pursuing financial reporting and accounting fraud cases, the agency said Wednesday. This move builds on prior efforts to crack down on bad actors in the accounting and auditing profession, according to SEC Enforcement Chief David Woodcock. The unit will be housed within the SEC’s Division of Enforcement and staffed by both attorneys and accountants with specialized skills related to financial reporting, accounting, and auditing in securities regulation.
David Woodcock, director of the SEC’s Division of Enforcement, said in a statement that since his return to the Division, he has been assessing every aspect of their staffing to ensure that they are aligned to deliver results in their core mission areas. The new unit will be led by Timothy Zimmerman, who joined the division in May as a senior adviser to Woodcock.
The announcement of the new enforcement unit is a little surprising given the SEC’s current deregulatory focus under Chair Paul Atkins, according to Rebecca Fike, a partner in Reed Smith’s regulatory and enforcement group. However, she noted that the move is consistent with Woodcock’s background, having previously chaired a Financial Reporting and Audit Task Force created at the SEC in 2013.
Woodcock said the new unit builds on the Enforcement Division’s longstanding work investigating accounting and auditing violations and will be critical in efforts to pursue financial reporting fraud, as well as accounting and auditor misconduct more generally. Fike said that time will tell what this really means — whether it’s about letting companies and accounting firms know the SEC is out there, or actually bringing cases or fraud charges.
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Attorneys at law firm Foley Hoag said in a client’s alert that whether the move ultimately results in a meaningful enforcement boost remains to be seen. They noted that the taskforce Woodcock previously chaired led to an increase in financial reporting cases that was small by historical enforcement standards. On the other hand, given diminished Public Company Accounting Oversight Board enforcement activity and a similar decline in Department of Justice investigations and cases focused on financial or accounting fraud, the SEC may attempt to fill the void with higher levels of Enforcement focus on the accounting and auditing industry and financial reporting matters in general.
Jina Choi, a partner in the securities enforcement group at global law firm Gibson Dunn, was not at all surprised by the announcement. Making sure an issuer’s financial statements are accurate and free from fraud is what investors expect from the SEC, Choi said in an email. She added that dedicating resources and expertise to pursue accounting and financial reporting fraud cases is very much in line with back-to-basics enforcement.
In light of the new anti-fraud unit, companies should pay special attention to internal reports and complaints about conduct in financial reporting and accounting, Choi said. Many SEC enforcement actions and investigations come out of whistleblower reports, and the numbers this year are trending up, she noted.
The Securities and Exchange Commission will likely provide more information on the new enforcement unit and its activities in the coming months. In the meantime, companies and individuals should be aware of the SEC’s increased focus on financial reporting and accounting fraud and take steps to ensure that their financial statements are accurate and compliant with all relevant laws and regulations, including those related to financial reporting.
