April 2013
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Taking a Close Look at the SEC
This past month has seen the impact of sequestration—mandated federal spending cuts that took effect on March 1—on the nation. Like all federal regulatory agencies, the SEC is feeling its effects. Although the commission may not have to reduce its workforce, spending cuts will likely slow the process for new regulations and limit staff hiring, travel, and training, according to SEC Inspector General Carl W. Hoecker. The agency suffered a 5.2% reduction in its 2013 budget—from $1.32 billion down to $1.25 billion as a result of sequestration.
Charged with the primary responsibility of protecting investors, the SEC has been criticized in the not-too-distant past for failing to detect major frauds, such as Bernie Madoff's Ponzi scheme, and for squandering the scarce resources it receives from American taxpayers. It's not surprising that the SEC's budget was in the crosshairs as Congress sought targets for spending cuts.
Conflict Minerals Provision
Legislators on the House Financial Services Committee also took the opportunity to voice their objections to a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that requires companies to disclose whether their products contain “conflict minerals” from the Democratic Republic of the Congo or adjacent regions. (For more information, see Greg Gaynor, Katherine Campbell, Dee Ann Ellingson, and Matthew Notbohm, “The Dodd-Frank Act's Conflict Minerals Provision: What CPAs Should Know about the SEC's Final Rule,” on p. 14 of this issue of The CPA Journal.) In the past, SEC regulations mainly focused on the financial protection of investors, rather than getting involved in matters pertaining to corporate social responsibility. Consequently, many are now questioning whether this is an appropriate use of the agency's resources.
Furthermore, the Dodd-Frank Act created significant extra work for the SEC—for example, oversight of the over-the-counter derivatives market and hedge fund advisors, development of a whistleblower program, promulgation of new rules, and generation of studies and reports—as well as continuing its prior duties. The commission is currently responsible for overseeing approximately 35,000 entities, 12 national securities exchanges, and 10 nationally recognized statistical ratings organizations (NRSRO), in addition to the PCAOB and the Financial Industry Regulatory Authority (FINRA), to name a few.
International Regulatory Complexity
As the business environment becomes progressively global, regulatory jurisdiction and enforcement problems are escalating. The SEC has been in a tug-of-war with the Chinese affiliates of the five largest international accounting firms (BDO, Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers); the commission recently charged them with securities violations for refusing to provide audit documents for U.S. publicly traded companies suspected of fraudulent activities. The firms said that releasing the documents would violate Chinese state secrecy laws.
Moreover, the SEC is in litigation with Longtop Financial Technologies Ltd, a Chinese technology business that the commission believes has been involved in fraud. The agency has subpoenaed the workpapers from the company's auditor, Deloitte Tohmatsu CPA Ltd, to investigate. But Deloitte has adamantly held that if it complies with the SEC's subpoena, it would expose the firm to harsh sanctions in China. The SEC has tried to resolve this matter through diplomatic channels with the Chinese Securities Regulatory Commission, so far without success.
Is Some Relief in Sight?
U.S. regulators have never been at the forefront of technology, but over the past few years, the SEC has caught up with the 21st century. Technological advances have provided regulators with tools in the fight against fraud. Aided by the widespread use of Extensible Business Reporting Language (XBRL), registrant filings have helped the SEC develop a database that can be used to evaluate financial reports and identify potential red flags for fraud. For more information, see Craig M. Lewis, “Risk Modeling at the SEC: The Accounting Quality Model” (The CPA Journal, March 2013, p. 12). Perhaps there is still some hope that regulators will be able to keep up with fraudsters.
As always, I welcome your comments.
The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.