Spotlight on Financial Reporting and Audit (FRAud) Group

The SEC Enforcement Division’s Financial Reporting and Audit (FRAud) Group is strengthening the agency’s efforts to identify and prosecute securities law violations related to financial reporting and audit failures.

In addition to identifying securities law violations in the preparation of financial statements and the disclosure of financial information to investors, the FRAud Group is identifying and exploring areas susceptible to fraudulent financial reporting. These efforts include an ongoing review of financial statement restatements and revisions, an analysis of performance trends by industry, and the use of technology-based tools.

Examples of Filed Actions:

The work of the FRAud Group has led to a number of matters undertaken across the Division, including inquiries, investigations, and filed enforcement actions. Examples of these matters include:

• A filed action against a holding company that, through its subsidiary and other affiliated entities, is one of the world’s largest providers of insurance products, including annuities, related to its longstanding internal control failures; see  In the Matter of MetLife, Inc.
• A filed action against a bank holding company and two of its officers in connection with reporting, recordkeeping, and internal controls violations; see In the Matter of The Bancorp, Inc.; James David Hilty; Donald F. McGraw, Jr.
• A filed action against an energy management company for financial reporting, books and records, and internal control violations related to its segment reporting; see In the Matter of PowerSecure International, Inc.
• A filed action against a bank holding company, its CEO, and three of its former officers for accounting violations involving the bank’s impaired loans; see In the Matter of Orrstown Financial Services, Inc., Thomas R. Quinn, Bradley S. Everly, CPA, Jeffrey W. Embly and Douglas P. Barton, CPA
• A filed action charging an oil company, and several individuals, including a company consultant and the company's external auditor, for deficient evaluation of the company's internal controls over financial reporting; see Magnum Hunter Resources Corporation Press Release
• A filed action against a retailer for materially misstating its pre-tax income due to improper valuation of inventory subject to price discounts and for having inadequate internal accounting controls; see Stein Mart, Inc. Press Release
• A filed action against an Issuer and its CEO, sole officer and director related to false statements in filings as to the effectiveness of the company's internal controls over financial reporting; see Initial Decision in the Matter of Traci J. Anderson, CPA; Timothy W. Carnahan; and CYIOS Corporation

A number of actions related to our ICFR Initiative against Respondents that failed to maintain internal control over financial reporting for seven to 12 consecutive annual reporting periods, or other failures, including:

• A filed action against a clinical stage biotechnology company for violations of the federal securities laws in connection with its Internal Control over Financial Reporting; see In the Matter of Northwest Biotherapeutics, Inc.
• A filed action against a global technology company for violations of the federal securities laws in connection with its Internal Control over Financial Reporting; see In the Matter of Digital Turbine, Inc.
• A filed action against a major steel producer for violations of the federal securities laws in connection with its Internal Control over Financial Reporting; see In the Matter of Grupo Simec S.A.B. de C.V.
• A filed action against a dairy food producer for violations of the federal securities laws in connection with its Internal Control over Financial Reporting; see In the Matter of Lifeway Foods, Inc.
• A filed action against a clinical stage biotechnology company for violations of the federal securities laws in connection with its Internal Control over Financial Reporting; see In the Matter of CytoDyn, Inc.

Blow the Whistle on Financial Reporting Fraud

The Financial Reporting and Audit Group welcomes input and information from public stakeholders who are in unique positions to help curtail financial reporting and accounting fraud, either by reporting such misconduct directly to the SEC or by sharing valuable research to inform the FRAud Group’s efforts.

Corporate Insiders

Information from a corporate insider may be the springboard for the SEC to launch an investigation, or the final piece of the puzzle in an existing investigation. The FRAud Group is particularly interested in receiving information from corporate insiders who may have witnessed or gained knowledge about improper conduct related to the preparation and audit of financial statements of public companies. In fact, fraud related to the preparation of financial statements or issuer reporting and disclosure can be extremely difficult to uncover without the help of corporate insiders. Submit a tip or complaint

Gatekeepers

The SEC draws on a number of sources to help identify possible financial fraud. Attorneys and auditors involved in the financial reporting process can spot misconduct by a company, its management, or its auditor. Submit a tip or complaint

Academics

Part of the FRAud Group’s mandate is to develop a deep understanding of the state of financial reporting specifically with respect to areas that are susceptible to fraudulent financial reporting and the related internal controls. Academics and others performing research in this area are invited to submit working and final drafts of academic research relevant to the FRAud Group’s work. As a matter of policy, SEC staff will not comment or serve as editor/reviewer for submitted papers, but the research may be helpful in informing the work of the FRAud Group. Submit papers or other research information to: FRAudGroup@sec.gov