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SEC Actions, why reactive rather than preventive?

Guest Author - Consuelo Herrera, CAMS, CFE

The Securities and Exchange Commission has been working hard in coping the financial and economic crisis. Although the actions seem fair given the market conditions, the question remains, why were these measures taken after the fact when the best cure for fraud is to prevent it for happening? It is always better to prevent than to detect and investigate. Costs related to investigating are greater than those incurred in regular basis.

Some of the actions taken by the SEC as a result were:

1. Aggressively Combating Fraud and Market Manipulation Through Enforcement Actions.

It will keep many forensic accountants really busy helping the FBI and the SEC. The increase of wrongdoing ironically has increased opportunities for fraud investigators and forensic accountants who with their knowledge will uncover the techniques used by fraudsters in deceiving trustful investors.

The SEC described how this regulators has been aggressively combating fraud and marketing manipulations through enforcement actions:

o Undertaking sweeping enforcement measures against market manipulation, and aggressively combating fraud that has contributed to the sub-prime crisis and the loss of confidence in credit markets. More than 50 pending SEC investigations in the sub-prime area. Likewise, it will represent more opportunities for forensic accountants who will spend hours and hours gathering information for court proceedings.

o Enforcement Division announced what will be the largest settlements in the history of the SEC for investors who bought auction rate securities from Citigroup, UBS, Wachovia, Merrill Lynch, RBC Capital Markets Corp., and Bank of America. The Commission has finalized the Citi and UBS settlements. There been enough publicity about this securities frauds

o Brought a landmark enforcement action against a trader who spread false rumors designed to drive down the price of stock.
Charged two Bear Stearns hedge fund managers for fraudulently misleading investors about the financial state of the firm's two largest hedge funds and their exposure to subprime mortgage-backed securities.

o Charged two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities.
Charged five California brokers for pushing homeowners into risky and unsustainable subprime mortgages, and then fraudulently selling them securities that were paid for with the mortgage proceeds.

o Charged Fannie Mae and Freddie Mac with accounting fraud in 2006 and 2007 respectively, and the companies paid more than $450 million in penalties to settle the SEC's charges.

2.Taking Swift Action to Stabilize Financial Markets
3. Enhancing Transparency in Financial Disclosure

Could this have been prevented? Is it over?

Of course it could have been prevented. Part of it could have been accomplished having an attitude of professional skepticism and a more proactive approach in the examination process. For example, it has been said that the external auditor that issued a clean audit report on Bernard Madoff was a very small local firm in the NY Area. Without questioning the partners’ individual qualifications, the size of the CPA firm should have raised a red flag for the SEC. Why the investment firm did not hire one of the big four to audit its financial statements? Surely cost was not a concern. Was it because the odds of uncovering fraud increase when the revision process involves several individual rather than one or two? The SEC should request that after certain amount of public wealth has been entrusted to a single investment firm, its financial statements should be audited by large firms to prevent instances such as the outcome in Madoff’s case which ended up in the largest pyramid scheme in history with over 50 billion of investments lost to fraud.
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Content copyright © 2013 by Consuelo Herrera, CAMS, CFE. All rights reserved.
This content was written by Consuelo Herrera, CAMS, CFE. If you wish to use this content in any manner, you need written permission. Contact BellaOnline Administration for details.

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