A new Financial Reporting and Audit Task Force formed by the Securities and Exchange Commission is scrutinizing companies’ use of measurements that do not comply with generally accepted accounting practices (GAAP), according to the panel’s leader. David Woodcock, Chairman of the task force, shed some light on its activities in a speech at a conference of the American Institute of Certified Public Accountants on December 10, 2013, The Wall Street Journal reported.

The task force was launched in July. (We reported on how the SEC has stepped up its investigation and enforcement of accounting-related matters in a previous alert.) While Mr. Woodcock has spoken previously about its direction, the Journal considers his comments to be the first specific indication “that the SEC is looking at [non-GAAP] metrics with an eye toward possible enforcement cases.”

Mr. Woodcock stated that the task force is examining so-called non-GAAP indicators by companies that he believes conflate commonly used performance-indicating terms with “nonstandard measures” to enhance their standing and claim profits rather than losses, a move he terms “mislabeling.” Though the Journal noted that nonstandard measurements themselves are not disallowed, companies must explicitly state which ones are nonstandard and reconcile those with standard measurements.

The article further suggests that recent initial public offerings by technology companies may have sparked the task force’s review of the terms companies use when reporting to potential investors. Specifically, the task force is examining instances where companies reveal high earnings using non-GAAP metrics to the public but disclose lower earnings for tax purposes, as well as other trends that may indicate fraud. This endeavor aligns with the SEC’s statement that the task force’s agenda is to detect “fraudulent or improper financial reporting” and to “enhance the [Division of Enforcement’s] ongoing enforcement efforts related to accounting and disclosure fraud.”

Though Mr. Woodcock did not disclose any specific companies that the task force is reviewing, his statements and the purported agenda of the task force could have meaning for public companies as well as their officers and auditors in other sectors besides the technology industry. These cases cannot be expected to come to a head overnight, however. Andrew Ceresney, Co-Head of Enforcement for the SEC, noted at the conference, “These cases are not easy cases,” and, “We need to have patience, and results will not happen overnight.” As the article further points out, there are roughly 12 members of the task force, consisting of both attorneys and accountants.

Ballard Spahr’s Securities Enforcement and Litigation Group represents clients in investigations, regulatory proceedings, and litigation involving the SEC, state attorneys general, and state securities regulators. Our Securities Group advises private and public companies, underwriters, selling stockholders, and officers and directors, as well as private equity funds, venture capital firms, and institutional investors in compliance matters, capital-raising activities, and other transactions.

In addition, the firm’s Professional Liability Group counsels accountants and other professionals in civil matters that affect their livelihood, reputation, license, and right to practice. It has regularly represented accountants and companies in SEC investigations into GAAP and other accounting issues. Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in such matters.

For more information, please contact Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com, or any other member of the Securities Enforcement and Litigation Group or Professional Liability Group.

 


 

Copyright © 2013 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

Related Practices

Professional Liability
Securities Enforcement and Litigation