SEC’s Accounting Unit Seen as Core Fraud Enforcement Engine

Partner and co-chair of Herrick's Securities Litigation and Enforcement Group, Arthur G. Jakoby, was quoted in Bloomberg Law discussing the Securities and Exchange Commission’s ("SEC") new specialized unit dedicated to investigating accounting fraud.

The article notes that "public companies and auditors are likely to see more SEC investigations more enforcement suits and bigger and more complicated cases now."

Whether the commission will be able to go after large corporations remains to be seen, said Arthur.

"The scale and complexity of a large multinational public company can make sophisticated fraud difficult to detect, even with a properly conducted audit," he said, adding much will depend on the resources the SEC dedicates to the unit.

The article highlights that "one question is what segments of the auditing profession will feel the heat."

"In the past, very often the SEC went after the small accounting firms," which were typically quick to settle, Arthur said.

Arthur’s practice includes a plaintiff-side role representing investors in suits over collapsed hedge funds, as well as white collar SEC defense and securities litigation defense.

His hedge fund suits involve larger accounting firms. "If you have a hedge fund that’s raising hundreds of millions of dollars for investors, those investors are usually pretty sophisticated," he said. "They’re not going to invest unless there’s a name-brand auditor," especially after Bernard Madoff’s historic Ponzi scheme, he said.

Often the fraudsters themselves are judgment-proof, Aruthur explained. "Why isn’t the SEC going after the gatekeepers, the professionals who are supposed to catch the fraud?"

"Auditors occupy a very unique position in the securities market because they’re often the only professional with direct access to the company’s or the hedge fund’s books and records," he said.

Read the full article in Bloomberg Law here. Access may require a subscription.