A Word From SEC on Accountability

This week the AICPA is holding its annual conference on Current SEC and PCAOB developments. This is the big industry event for financial reporting and compliance professionals. And, thankfully, we also have a great speech from one SEC official on the importance of ethics and accountability. 

The official in question is Ryan Wolfe, senior associate chief accountant in the SEC’S Office of the Chief Accountant. He took to the stage on Monday to talk about work he has done supporting the SEC’s Division of Enforcement.

First, Wolfe to the audience not to kid itself. smart people abound in this profession, and usually we know when something doesn’t pass the smell test.

In a majority of the cases I’ve worked on, there’s someone involved who recognized at some point that what they were involved with didn’t feel quite right or make sense. Perhaps they couldn’t figure out why that complex financial instrument no one had done the necessary work to understand had been steadily marked up in value over the years. Perhaps someone got a funny feeling about a series of transactions entered into before the quarter end.

This is true. Think of all the enforcement cases we’ve seen from the SEC or the Justice Department. How many began with a tip to regulators? How many included a cooperating witness? How often have you investigated a suspicious transaction, and noticed that a potentially crucial employee quit months ago? How often do we see major enforcement actions become public, and low-level employees start saying, “We warned you about this for years!”

Then Wolfe moves to the need to take action, even on a personal level.

However, burying your head in the sand, not doing the work needed, and hoping for the best is not an effective strategy in life or accounting. I get the sense in many of the cases I work on that people involved wished they had done the work, said something to raise an issue – or if they did raise an issue, that they had done so earlier.

That’s not news, either. People want to speak up about misconduct. They fear retaliation or disinterest from senior executives. But if you’re hiring the right people, rarely will they see misconduct and simply not care.

When we don’t speak up about misconduct, what we do, really, is hope. We hope someone else will speak up. We hope the offenders will stop their misconduct, or leave the company. We hope that the problem goes away, without us needing to risk our necks personally by calling out the conduct we know is wrong.

Wolfe tackles that, too.

And in my experience, people often fall into the trap of thinking someone else will address larger problems. When it gets to the point where we and the Division of Enforcement are involved, there’s often a great deal of finger-pointing and blame shifting … But few would argue with the idea that, had some party to the matter stepped up and taken more responsibility for resolving an issue, investors could have avoided harm, or at the very least, the company could have avoided the cost and effort of addressing other significant consequences (including responding to an enforcement investigation).

Wolfe’s words hold true for all employees in any organization, but they hold especially true for audit, compliance, and financial reporting professionals. We do have a higher duty to call out misconduct. Compliance and audit professionals are gatekeepers. The higher standard comes with the job, even if living up to that standard isn’t easy to do.

accountabilityYears ago I had to report a supervisor’s ineptitude to senior executives, and the senior executives fired me. I was ultimately proven right (the supervisor was fired a few months later), but that wasn’t much solace on the commute back home with a box of personal effects on my lap. And I had to raise concerns about missed deadlines, botched projects, and unhappy staff – small stuff, really. I can only imagine how much more pressure comes to bear with suspicions of illegality and fraud, where millions of dollars for legions of investors might be on the line.

This professional community needs common sense credos like the above words to support ourselves in difficult times – which will happen inevitably if you stay in this business long enough. Kudos to Wolfe for saying it.

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