United States: 美国证监会财务报告及披露执行情况覧2015更新(英文版)

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.

EXECUTIVE SUMMARY

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葉hose 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 ァ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.

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Footnotes

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).

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.

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