Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER ELEVEN

The Securities and Exchange Commission

ONE OF THE BIGGEST CHALLENGES upon the discovery of fraudulent financial reporting is evaluating the best way to deal with the Securities and Exchange Commission. From the moment financial fraud is discovered, critical decisions must be made regarding the company's approach and strategy. Should the company self-report to the SEC or wait for a subpoena? Should it cooperate with the SEC or resist? Should it confess or defend?

Making such decisions particularly difficult is the need to make them at an early stage when the information is typically vague and uncertain. There may be serious doubt as to whether the early evidence constitutes fraudulent financial reporting at all or, even if it does, whether it is significant enough to affect any SEC filings. A further complication involves the SEC's ability to judge the company's approach with hindsight. If a company believes it has justifiably concluded that potential evidence of fraud is in fact an honest mistake, but it turns out otherwise in the end, the SEC's ultimate reaction may be harsher than the company would like. Still another complication involves the ramifications of SEC interaction upon other problems with which the company will be dealing. The outside auditor, for one, will be exceedingly attentive to the company's approach to the SEC and can be easily distressed if things seem to be going awry. The company's approach to the SEC may also have an impact upon the company's ...