United States: SEC Enforcement In Financial Reporting And Disclosures - 2015 Update

We are pleased to offer our clients and friends this update on financial reporting and issuer disclosure enforcement activity in 2015. It will focus principally on the Securities and Exchange Commission ("SEC") but will include other developments outside the SEC where we deem relevant. We will also discuss where things might be headed in the future and actions that companies, directors, and officers can take to minimize the likelihood of becoming embroiled in an investigation.

The last year has demonstrated that the SEC is as focused on financial reporting and issuer disclosure violations as it has been in many years. The agency is filing more cases in the area, and while the subject areas for those cases are largely unchanged from historical patterns, the SEC is alleging more technical and some might say less egregious (non-fraud) violations than we have seen in the past. The cases also involve individuals more often than not, so the critique lodged against other government departments for not targeting individuals would not be fairly applied to the SEC. And there is little reason to believe this aggressive approach will abate anytime soon because the agency is using data, tools, and new techniques to find more cases, and the whistleblower program is attracting more financial reporting and disclosure tips every year. Overall, it is fair to characterize the SEC's approach to this area as aggressive and proactive, in a way that should cause companies, management, and boards to reexamine the internal controls and processes around financial reporting and disclosures.


Financial reporting and issuer disclosure violations are among the most costly types of securities violations. While prosecuting them has always been an important part of the SEC's agenda, the internal reshuffling of resources following the financial crisis and the extensive rulemaking required by the Dodd-Frank Act caused the agency to prioritize other areas. Now that its agenda is no longer driven by those same factors, financial reporting and disclosure have returned to the top of the SEC's enforcement agenda. And there is every reason to believe the SEC will continue to focus on this area in the near term.1

The first notable development in the last year is that, no matter how you count them, there has been a sharp increase in the number of actions filed over the past three years. The number of financial reporting and disclosure actions filed in fiscal year 2015 increased to 134 cases, a dramatic increase from the 98 in 2014 and 68 in 2013.2 Many of the actions are less severe in terms of the misconduct and smaller in terms of penalties and disgorgement relative to the massive restatement cases filed in the mid-2000s, but the increase in activity in this area is nonetheless notable. We might expect this trend of more relatively smaller actions to continue in part because the number and average size of restatements themselves are down sharply.3

Another clear trend is the very public focus on bringing cases against individuals. This includes individual officers, directors, auditors, and accountants—those who are in a position to ensure that financial statements and disclosures are accurate and that company compliance programs are operating effectively. Another trend is the continued effort to hold gatekeepers accountable for fraud and negligence in financial reporting and disclosures.4 In a somewhat related development, the Department of Justice ("DOJ") issued an internal memorandum to prosecutors that reemphasizes the DOJ's desire to criminally prosecute individuals and requires corporations to identify individual wrongdoers and provide evidence against them to the government in order to obtain cooperation credit.5 The dual focus by the SEC and DOJ on pursuing actions against individuals is a trend that may significantly affect the conduct of government and internal investigations, as well as the defense of issuers, officers, and directors.

Another sign of the SEC's aggressive and proactive approach in this area is its conversion of the Financial Reporting and Audit ("FRAud") Task Force to a permanent group within Enforcement, signifying the SEC's long-term interest in this area. First created in 2013, the slightly reconstituted FRAud Group will continue focusing on developing and refining methods to identify potential new investigations, working with data to better detect fraud and investigate cases, and serving as thought leaders in the area of financial reporting, issuer disclosures, and auditor liability. Related indications of proactive enforcement in this area include the increasing use of data analytics to identify potential wrongdoing and the burgeoning importance of whistleblowers.

Another trend worth watching is the increasing focus on internal controls and other technical violations. Whether this is properly included in the SEC's "broken windows" approach is unclear, but the SEC continues to initiate enforcement actions focused on internal controls and books-and-records violations. The SEC filed some notable internal controls-only enforcement actions this past year that did not involve any accusations of fraud. How far the SEC will go in the space remains to be seen, but at some point the Commission may need to address its long-standing policy not to use the books-and-records and internal controls provisions to expose companies and individuals to enforcement action "as a result of technical and insignificant errors in corporate records or weaknesses in corporate internal accounting controls."6

Some other developments outside enforcement are also worth mentioning for 2015. The most notable is the United States Supreme Court's decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, which set out rules for determining whether a statement of opinion constitutes a material misstatement or omission under §11 of the Securities Act of 1933. The SEC also continued its flurry of Dodd-Frank rulemaking with several of its efforts touching on issuer disclosure and financial reporting. The most impactful of these may be the new Rule 10D-1, under which companies will be required to develop their own policies and procedures for clawing back certain executive compensation in the event of a restatement without regard to the involvement or fault of the executive.

We should expect to see continued focus on financial reporting and issuer disclosure matters. First, the leadership has signaled a strong interest in this area, so until that leadership changes, we should expect continued strong interest. Second, the creation of the FRAud Group has reenergized the area, as attorneys and accountants are motivated by internal competition to find the next big financial reporting or disclosure fraud case before the FRAud Group identifies it first. Third, the current downturn in the energy sector and depressed growth in some key foreign countries are creating deterioration in business fundamentals that companies may be tempted to delay recognizing and disclosing. As a result, we should expect to see continued focus on financial reporting and disclosures.

In view of all this, some suggestions for how companies, management, and directors can respond include:

  • Create the right tone at the top. From the top down, consistently communicate that ethical behavior and compliance are paramount values of the company.
  • Reexamine your ethics and compliance program. This includes structural evaluations, regular audits and testing, and training. Every employee must believe he or she is part of the compliance function, regardless of title or level.
  • Encourage a "speak up" culture. Employees at every level need to know senior management and the board expect them to speak up when they see a problem and will reward them when they do, even if the news is bad.
  • Synchronize internal and external communications. Continually consider how an investor or an SEC enforcement attorney reading the company's disclosures would view internal discussion of the company's condition because a wide variance between internal communications and external disclosures will be Exhibit A in an enforcement action.
  • Focus on internal controls. Management and the board must continue to focus on internal controls because the SEC is focused on them.
  • Embrace would-be whistleblowers. Ensure you have (i) strong procedures for promptly escalating and addressing whistleblower complaints internally and (ii) good controls for preventing retaliation against whistleblowers.

While there is no one answer to how to deal with the SEC's focus on financial reporting and disclosures, it never hurts to be reminded of the importance of ethics and compliance.


1 See Andrew Ceresney, Director, SEC Div. of Enforcement, "Directors Forum 2016 Keynote Address" (Jan. 25, 2016).

2 Emily Chasan, "SEC Doubles Number of Financial Reporting and Audit Cases in Two Years," Wall St. J.: CFO J. (Oct. 22, 2015).

3 See Tammy Whitehouse, "Parsing the Data on Financial Restatements," Compliance Week (May 5, 2015).

4 SEC. AND EXCH. COMM'N, "SEC Announces Enforcement Results For FY 2015" (Oct. 22, 2015).

5 Sally Q. Yates, "Memorandum re: Individual Accountability for Corporate Wrongdoing" (Sept. 9, 2015) [hereinafter Yates Memorandum]; Jones Day, "U.S. Department of Justice Announces Updated Guidelines on Individual Accountability for Corporate Wrongdoing: Implications for Internal and Government Investigations" (Sept. 2015).

6 Harold M. Williams, Chair, SEC, "The Accounting Provisions of the Foreign Corrupt Practices Act: An Analysis," at 6, SEC Developments Conference, AICPA (1981).

Download - SEC Enforcement in Financial Reporting and Disclosures - 2015 Update

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.