Analytics Inside: the SEC’s renewed focus on fraud

Yesterday, the SEC announced major initiatives that will bring more focus to the problems of financial statement fraud, risk analysis and microcap fraud. In each section of the announcement there was a clear and increased appreciation for technology supporting cross-functional teams. Let’s look a little deeper.

The investment of the SEC in moving to XBRL tagged filings is paying off in its ability to marry traditional pursuit activities of it s statutory purpose with innovative data mining and analytics. What’s needed to power these initiatives to the next level is even more tagged data. In discussions I’ve had at conferences and online, the priority statements to tag are the 8-K earnings release and the DEF 14 proxy statement.

The 8-K is a time sensitive filing, and the power of analytics needs to be brought to bear on the problem of comparing the financial highlights reported in the 8-K to previous filings. Tagging an 8-K shouldn’t be a difficult or time consuming exercise, given the fact all filers are now familiar with tagging the face financials. Nor do we need to start with detailed tagging of the entire filing, though we might end there.

The proxy statement is an important tool for understanding corporate governance. It helps us understand if there is a long term disconnect between the management and the best interests of shareholders. This is demonstrated in executive compensation, board tenure and structure, and voting arrangements. All of this can and should be tagged.

What we don’t need, however, is overlap and duplication of effort. In this area, the announcement was cause for concern. The microcap fraud group overlaps significantly with an existing working group, and the new Center for Risk and Quantitative Analytics sounds like it should fall within the existing Division of Economic and Risk Analysis.

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