SEC’s Data-Driven Enforcement on the rise
The US Securities and Exchange Commission (SEC) has never been shy of enforcement action. It’s very encouraging to see evidence that the Commission’s enforcers are increasingly relying on advanced analytics. Over the past few months alone it has filed three actions against companies for disclosure violations, including for falsifying reported earnings. Fines to the tune of $7 million have been levied in these cases. These recent actions were the first to stem from the SEC’s Division of Enforcement’s new earnings per share (EPS) Initiative, which harnesses data analytics to uncover misleading earnings management.
Firms in the US report in Inline XBRL format, helping the SEC to analyse massive amounts of data quickly and spot inconsistencies. XBRL makes it simple to compare a company’s disclosures over time, or to analyse a specific type of data across various companies, allowing the SEC [Ed: and investors!] to zero in on unusual disclosures that could point to misconduct.
In recent years the SEC has been ramping up its ability to leverage big data in order to spot violations. This means that SEC Enforcement can launch investigations internally, based on reported data, rather than relying on external whistle-blowers.
And for the future? The SEC has indicated that it will be keeping a close watch on the integrity of financial reporting in the post-pandemic climate, and in particular will be using its data analytic capabilities to examine disclosures that may attempt to disguise previously undisclosed weaknesses as Covid-19 related. No doubt, the SEC’s experience is being watched closely by securities regulators worldwide.
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