SEC to Stay Focused on Accounting Practices
The Securities and Exchange Commission plans to continue its closer scrutiny of corporate accounting practices, and will shortly announce significant new cases involving alleged accounting abuses, the agency’s enforcement chief said.
“I anticipate that we will continue to make accounting fraud our No. 1 enforcement priority because it goes to the core of our mission,” SEC enforcement director Richard H. Walker said in an interview with Bloomberg News.
Former SEC Chairman Arthur Levitt, who left office Feb. 9, made financial fraud the agency’s chief enforcement priority during the last couple of years of his 7 1/2-year tenure.
Walker said the focus won’t change despite Levitt’s departure. President Bush has yet to nominate a successor to Levitt.
Lucent Technologies Inc. and two other companies have disclosed in recent weeks that their accounting practices are being investigated by the SEC. Still other companies, including Sunbeam Corp., are bracing for possible fraud charges after becoming targets of long-running SEC accounting inquiries.
Walker, who has been the SEC’s top cop since May 1998, said he expects the agency “to bring significant enforcement cases in this area in the near future.” He declined to identify specific targets.
Levitt had laid much of the blame for accounting fraud on corporate executives who, he said, manipulated results to meet Wall Street analysts’ forecasts. This “game of nods and winks” reflected executives’ efforts to prop up their companies’ stock prices, he said.
Walker’s plan to continue Levitt’s priorities has drawn criticism from some executives in the accounting sector. They say the limited nature of the problem doesn’t warrant the resources that the SEC has marshaled.
“The new economy is causing business transactions to occur that are not specifically contemplated by all the rules, so interpretation comes into play,” said Alan Anderson, a senior vice president with the American Institute of Certified Public Accountants, the main accounting trade group.
Noting there are about 16,000 public companies, Anderson said, “Our batting average has been very good over the years.”
Robert Willens, a Lehman Bros. analyst who specializes in accounting and tax issues, said, “Part of what is called fraud is simply companies trying to catch up to changing regulations.”
Walker, speaking of the hundreds of cases brought by the agency in recent years, said the most common type of accounting fraud has been improper recording of revenue. This can occur when a company books revenue for sales that never took place, accelerates or defers revenue to another quarter or books sales before they are confirmed, he said.
“Investors have lost billions of dollars in the last few years when companies dropped in market value after restating earnings” because of what turned out to be faulty sales accounting, Walker said.
SEC civil fraud charges can result in fines against companies and individuals and prohibitions against executives working again for public companies. The SEC has formed a 15-member task force of lawyers and accountants devoted to investigating financial fraud.
About 100 of the SEC’s enforcement cases last year involved accounting fraud, agency data show. Charges were filed against 26 companies, 19 CEOs and 19 chief financial officers.
Among those sued were former executives of Cendant Corp., the parent company of Days Inn hotels, and McKesson HBOC Inc., a health-care services company.
