The head of the Securities and Exchange Commission's new Financial Reporting and Audit Task Force says he will be using data mining and other techniques to find companies who may be skating on thin accounting ice. In an interview with Strategic Finance, David Woodcock, Director of the SEC's Fort Worth Regional Office and head of the task force announced in July, explains that instead of relying on whistleblower tips or looking at public restatements, the task force will use internal and external data mining technologies and data bases such as the SEC's accounting quality model to locate companies who appear to be using aggressive accounting. "We will incubate the cases, basically kicking the tires of the company's accounting," he explained. If the task force finds some potential financial reporting or accounting fraud, it will refer the company to either a regional office or the national enforcement division for additional investigation.
Woodcock appears to be uniquely suited for this job, which he will be doing part time, ceding full time responsibilities to a staff of about eight professionals, half accountants, half lawyers, who will remain in the current locations. They will not relocate to Ft. Worth. Prior to obtaining a law degree, Woodcock worked for four years at Ernst & Young and Price Waterhouse as an auditor, and received a CMA certification.
Some have argued that the SEC has ignored financial reporting fraud over the past decade, possibly because the Sarbanes-Oxley reforms may have curbed those problems, or perhaps because the agency, especially since 2008, has been preoccupied by Wall Street and financial company excesses. But Francine McKenna, who has written about accounting fraud in Forbes magazine, published a story last October which stated that the SEC’s 2012 whistleblower program statistics show that the most common complaints are for corporate disclosures and financial fraud, 18.2 percent, "even though we know now that it’s the eleventh straight year of fewer enforcement cases filed for accounting fraud and disclosure violations."
Woodcock says he does not think the SEC has turned a blind eye to corporate reporting fraud. He admits, however, that he doesn't know the dimensions of problems in that area. He aims to find out, by "concentrating" the agency's resources which have been somewhat spread around, and by going outside the agency to academic experts and others who may have some useful technologies for analyzing and finding corporate financial peccadilloes. The task force will be looking at both small and large companies, paying particular attention to areas such as revenue recognition, underreporting of costs and expenses, long term contract accounting, reserves and allowances and non-GAAP measures.