Risk & Compliance

SEC Scrutiny

They'll be Watching
Jake WengroffJuly 1, 2001

You may be hearing from us,” warns chief accountant Robert A. Bayless, of the Securities and Exchange Commission’s division of corporation finance. Apparently, before the slowdown in initial public offerings this year, companies had a 1 in 15 chance of being reviewed. But with extra time on its hands, the SEC hopes to boost the ratio to 1 in 4. “The threat of facing an SEC investigation is real,” explains Larry Rieger, worldwide managing partner of assurance services at Chicago-based Andersen. “The immediate impact is that all companies are being more careful and conservative.”

Executives can expect the SEC to pay special attention to several key areas, including segment disclosure, market and credit risk, impairment losses, nonrefundable payments, derivatives and hedging activities, and intangible assets. Perhaps the biggest area under investigation is revenue recognition, specifically payment for delivery of products and services.

It’s been more than 10 years since the SEC identified issuer financial statement and reporting abuses–including revenue recognition scams–as a core area of enforcement, says Paul Gerlach, a partner at Washington, D.C.-based law firm Sidley Austin Brown & Wood and former associate director of the SEC’s division of enforcement. He estimates that 20 percent of the SEC’s current enforcement cases are in this area. “And I don’t think enforcement priorities will change because a new chairman is confirmed,” he adds, referring to President Bush’s appointment of Washington, D.C.- based attorney Harvey Pitt to head the SEC.

Pitt, who still needs Senate approval before taking the reins, is a partner at Fried Frank Harris Shriver & Jacobson. If confirmed, Pitt will be faced with managing an SEC investigation of Wall Street investment banks suspected of manipulating the distribution of hot dot- com IPOs in exchange for aftermarket consideration. Opponents say individual investors will lose with Pitt as the top watchdog, because he will be overseeing the industries he used to defend as a securities attorney. But associates disagree.

“Harvey is an independent thinker, and his strength is that he will use his leverage with the private sector to work out problems that cannot be solved through regulation alone,” stresses Louis Thompson, president and CEO of the National Investor Relations Institute, in Washington, D.C. To further his point that Pitt is his “own man,” Thompson notes that the Republican Administration’s nominee was the SEC’s general counsel under Democrat Jimmy Carter. –Jake Wengroff