The U.S. Securities and Exchange Commission (SEC), is strengthening its focus on data-driven investigations.
The agency’s two areas targeted for recent enforcement are, corporate entities’ manipulations to achieve earnings per share (EPS) estimates, and undisclosed executive compensation, especially as it related to executives’ usage of corporate aircraft.
An Assistant Regional Director of the commission, Diana Tani, gave this hint recently at the “Securities Enforcement West” conference
According to findings, the recent enforcement actions suggest that the SEC is targeting quarterly public filings which are not subject to the same accounting oversight as annual reports.
A research article on the SEC’s latest regulatory moves sourced by our correspondent from an online legal research reporting firm, lexology.com, indicated that recent cases highlighted by the agency as examples of data-based enforcement actions suggested that its focus with data-based investigations is on quarterly reports and other areas where manipulation may be more likely to occur.
It reported: “The SEC’s use of advanced analytics tools is not new for the agency. It is simply the latest iteration of a longstanding push to stay up to date with advancing technology. Before the focus on EPS and corporate perquisites, the SEC used data analytics tools to identify abusive trading and insider trading based on real-time analysis of trading data.
“These efforts trace back to 2011, when the SEC created the Analysis & Detection Center under the Market Abuse Unit in the Enforcement Division.
“In a 2016 address, then-Chair Mary Jo White emphasized the need for the SEC to use in-house data analysis to originate cases, lessening the agency’s reliance on outside tips and whistleblowers for information.
“The SEC’s expanded use of data analytics in the realm of company filings, while more recent, still has deep roots. In 2018, the Wall Street Journal reported on findings from an academic paper which revealed an abnormally low rate of reported EPS figures with a “4” in the tenths place.
“The article suggested that companies would have a strong incentive to increase reported EPS figures, because a small change would be amplified due to the effects of rounding.
“The Journal reported that the paper was widely read within the SEC’s Enforcement Division.[6] The fact that the SEC is now announcing enforcement priorities related to EPS estimates suggests the continued relevancy of this paper to the SEC and indicates the agency’s continued investment in data analysis in new enforcement areas.
“Reading between the lines of the press releases surrounding recent enforcement actions and other SEC commentary, it appears that the targets for these new enforcement initiatives are relatively small manipulations to figures that can have an alleged outsized effect by causing a company to meet analysts’ EPS expectations or attain other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks”, it added.
The legal research firm noted that a recent enforcement action highlighted the focus on EPS manipulation at the SEC and the use of data analytics.
For instance, in an action against Fulton Financial Corporation, the SEC discovered that Fulton had altered its valuation methodology for certain mortgage servicing rights to lower its EPS to meet analyst predictions in several quarters, followed by a reversal of this methodology which also resulted in a nearly exact match with EPS targets.
“The SEC found that “Fulton’s disclosures created the misleading appearance of consistent earnings across multiple reporting periods” and credited its “internal data analysis tools” with uncovering the false reporting.
The researchers reported that the takeaway from the SEC’s action “is that a company’s recurring pattern of meeting or barely exceeding EPS estimates may cause the SEC to inquire further into a company’s financials, especially if the performance appears to be driven by a single category that may register as an outlier against a company’s previous filings”, adding that this, in turn, suggests that the SEC’s new data analytics tools are targeting previously hard-to-detect violations—the discovery of which, until the emergence of these tools—would have required the allocation of significant resources.
Projecting that the SEC’s increased use of advanced data analysis will likely spill over into other enforcement areas, the researchers cautioned that consequently, “companies should be cautious when making accounting adjustments or compensation calculations, especially where those changes can cause the company’s reported figures to appear as an “outlier” compared to past data, even in areas not currently announced as data-driven enforcement priorities.”
