The Fraud Examiner

The SEC’s Newest Tool is Headed to the Front

August 2013 

By ACFE Staff 


In the ongoing battle against financial reporting fraud, the Securities and Exchange Commission (SEC) is employing technology in a way that is making waves in Wall Street circles — enough so that, according to a recent Forbes article, a key tool in the SEC’s approach has been given a nickname: RoboCop. The obvious image (at least for those familiar with the futuristic movie franchise of the same name) is a steel plated, heavily-armed crime fighter who patrols the mean streets of Detroit in a bleak struggle for justice.


Computers analyzing financial statements for accounting anomalies does not, admittedly, inspire such drama. But in the effort to detect more fraud, the new weapon that the SEC is calling its Accounting Quality Model (AQM) has real potential to be a game-changer. For fraud examiners, data analysis and other technology-driven means used by AQM will be familiar and, for some, old hat. But employed by the SEC as a resource for reviewing potentially thousands of corporate filers, it stands to reason that leads, audits and enforcement actions could dramatically increase in the near future.


Why Now? 

In 2012, only 11 percent of the SEC’s enforcement actions resulted from accounting and financial-disclosure fraud, according to the Forbes piece. SEC Chairman Mary Jo White has signaled a desire to step up such actions. According to an SEC press release posted in July, the AQM is an element of their Division of Enforcement's “ongoing efforts to concentrate resources on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations.”  


Notably, the other main elements are the SEC’s Financial Reporting and Audit Task Force, dedicated to detecting fraudulent or improper financial reporting; and the Microcap Fraud Task Force, targeting abusive trading and fraudulent conduct in securities issued by microcap companies.  


The press release stresses that the technology and analytics tools are meant to make the SEC’s hands in the field more effective — in other words, RoboCop is not replacing the street cop in terms of real investigative work. As is the case for fraud examiners at large, real people are needed to interpret the findings from quantitative analytics and provide follow-up investigation to determine true facts. The implications are clear, however — the potential for broad, first-line detection of red flags could fill a gap where incidences of fraud aren’t tipped by whistleblowers. 

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