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Regulation and Compliance > Federal Regulation > SEC

SEC Too Lax on Accountants, Commissioner Says

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SEC Commissioner Luis Aguilar warned Thursday that the agency’s statistics on financial reporting, disclosure cases and Rule 102(e) suspensions reflect a “troubling trend.”

Reacting to the SEC’s recent order accepting the settlement offer of Kevin Kyser, a certified public accountant and former chief financial officer of Affiliated Computer Services Inc., Aguilar said in a public statement that “given the egregious conduct that Mr. Kyser engaged in at ACS, the Commission’s settlement, which lacks fraud charges or a timeout in the form of a Rule 102(e) suspension, is a wrist slap at best.”

The SEC charged former CFO Kyser and former CEO Lynn R. Blodgett of ACS, a Dallas-based information technology company that has since been acquired by Xerox Corp., with mischaracterizing an arrangement with an equipment manufacturer to purport that it was conducting so-called “resale transactions” to inflate the company’s reported revenue.

Blodgett and Kyser have agreed to pay nearly $675,000 to settle the SEC’s charges. Without admitting or denying the findings, they have agreed to collectively disgorge IRG-related bonuses plus prejudgment interest totaling $569,327, and they each must pay $52,000 penalties.

But Augilar noted in his public statement against the settlement that “accountants — especially CPAs — serve as gatekeepers in our securities markets. They play an important role in maintaining investor confidence and fostering fair and efficient markets. When they serve as officers of public companies, they take on an even greater responsibility by virtue of holding a position of public trust.”

To this end, he continued, “when these accountants engage in fraudulent misconduct, the Commission must be willing to charge fraud and must not hesitate to suspend the accountant from appearing or practicing before the Commission.”

Said Aguilar: “The Commission instead chose to charge Mr. Kyser with limited, narrow non-fraud charges, comprising of violations of the books and records, internal controls, reporting, and certification provisions of the federal securities laws.”

Aguilar expressed his concern that the Commission “is entering into a practice of accepting settlements without appropriately charging fraud and imposing Rule 102(e) suspensions against accountants in financial reporting and disclosure cases. I am also concerned that this reflects a lack of conviction to charge what the facts warrant and to bring appropriate remedies.”

He noted the steady decline in the number of financial reporting and disclosure cases and related Rule 102(e) suspensions that have been brought by the commission. In fiscal 2010, the Commission brought 117 financial reporting and disclosure cases against issuers and individuals, and imposed Rule 102(e) suspensions in 54% of those cases, Aguilar said. In 2011, the number of financial reporting and disclosure cases against issuers and individuals brought by the Commission fell to 86, and the Commission imposed Rule 102(e) suspensions in 53% of those cases.

In 2012, again the number of similar cases brought by the Commission fell, this time to 76, and the Commission imposed Rule 102(e) suspensions in 49% of those cases. In 2013, the Commission brought only 68 similar cases, and imposed Rule 102(e) suspensions in only 41% of those cases, he said. “These declining numbers reveal a departure from the Commission’s efforts to keep bad apples out of the securities industry, and this puts investors and the integrity of the Commission’s processes at grave risk.”

Aguilar, who has been a commissioner for six years, said that he worries the agency is allowing Rule 102(e) suspension violation charges to be turned into lesser books and records and internal control violations. This practice, he said, “often results in individuals who willingly engaged in fraudulent misconduct retaining their ability to appear and practice before the Commission.”

Aguilar continued that he worries “cases in the future will continue to be weak. More specifically, I fear that when the staff determines not to seek a Rule 102(e) suspension, it will also forgo bringing fraud charges. Likewise, I am concerned that Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred. When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant’s misconduct.”

Check out SEC, FINRA Enforcement: Citi Global Markets Fined $2 Million on ThinkAdvisor.


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