Sec's New Initiatives

Case: Independent Study

Youngjin Choi

Correlation does not imply causation. It was one of most popular phrases in the Statistics class. Recently, I read an article and enjoyed the statistical practices in accounting discussions. The article is “SEC’s New Focus on Accounting Fraud” written by Jonathan B. MacKenzie (http://www.law360.com/articles/460715/sec-s-new-focus-on-accounting-fraud-what-s-on-its-radar).

Accounting fraud cases brought by the SEC have been decreasing in recent years. As shown in the graph below, the financial fraud matters brought by Enforcement became 11% in 2012 fiscal year compared to 29% in 2003 fiscal year. During those years from 2003 to 2012, the total enforcement actions by the SEC did not decrease.

Data source: http://www.sec.gov/news/newsroom/images/enfstats.pdf

From the decline trend of percent, there could be two main questions. First, what are the causes to this decline trend? The next one is how long it will keep the momentum.

The decline trend in recent years seems to be logically explained by two possible scenarios. One is that financial reporting has actually improved after the Sarbanes-Oxley legislation in 2002. The other is that financial fraud remained the same level as before, but less fraud has been detected due to shifted priorities at the SEC. The examples include restructuring of the Enforcement Division, in 2009, into five specialized units, missing emphasis on detecting financial fraud and disbanding the Financial Fraud Task Force, established in 2000, in 2010. I think the recent decline trend of fraud matters brought by the SEC is the result of both of improved financial reporting and the shifted priorities at the SEC.

Running single regression model for Financial Fraud/Issuer Disclosure Percent on SEC Fiscal year, one can derive an equation to predict the financial fraud matter, which is expected to decrease and become zero in 2041. The equation is Financial Fraud/Issuer Disclosure Percent =...