SEC taskforce to monitor financial statements

The taskforce will use data mining programs to evaluate financial statements susceptible to fraud, an initiative underscoring the SEC’s use of data analytics to pursue investigations.

On Tuesday the US Securities and Exchange Commission (SEC) unveiled its recently assembled Financial Reporting and Audit Task Force, which will use technology-based tools such as the Accounting Quality Model to detect fraud. 

The taskforce, chaired by SEC regional director David Woodcock, highlights the agency’s growing use of data-driven monitoring programs to concentrate their limited resources on high-risk companies and advisers. 

The Accounting Quality Model for example uses different risk indicators to cherry pick financial statements that appear anomalous to issuers in its peer group.

A few risk indicators revealed by SEC chief economist Craig Lewis in a December 2012 speech include a high proportion of transactions structured as “off-balance sheet”, frequently changing your auditor and delays in the release of financial statements or earnings reports. 

While the Financial Reporting and Audit Task Force will concentrate its efforts on 10-Ks, non-listed private equity firms registered with the SEC are screened under similar data mining programs. 

An enforcement unit specializing in the policing of alternative asset managers, the Asset Management Unit (AMU), uses “proprietary risk analytics” to evaluate fund returns, according to an earlier SEC press release mentioning the initiative.

Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny

“Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny,” the statement said.  

The AMU has brought seven cases resulting from the initiative, according to a person familiar with the matter.  

A key objective of the agency’s data programs will be to assist staff in the field, bringing them “analytical techniques and computing capacity with special expertise in data mining, and help them translate their valuable ideas into timely, thoughtful, and targeted investigations of national scope”, said George Canellos, co-director of the Division of Enforcement in a statement.