Faced with a limited budget and committed to more frequent reviews of filings by large registrants, the Securities and Exchange Commission (SEC) is developing new analytical software to help identify the reports most likely to contain accounting irregularities or other potential problems.
If You Build It...
SEC corporation-finance director Alan Beller told Bloomberg the software will search for trouble signs with a company's debt, cash flow, and disciplinary history. Specifically, the SEC will be looking for companies with high levels of debt in comparison to others in their industry and those whose cash flow is relatively low compared to profits.
"In recognition of the limits of our resources," Chairman Harvey Pitt explained to the Senate Banking Committee, "we are working to further the application of risk management techniques to our review process." Mr. Beller said the software could be completed in the next 12 months.
...They Will Come.
Critics wonder why auditors don't already have such a system. "One of the biggest challenges the SEC will face is trying to find trouble spots that often elude corporate auditors and accounting firms," said Melvin Weiss, senior partner at Milberg, Weiss, Bershad, Hynes & Lerach, the lead firm in the Enron shareholder class action lawsuit. "That's what auditors are supposed to be doing," said Weiss. "It's sort of interesting that they (the SEC) think they can do that, but the actual auditors don't have the same techniques to spot trouble."
Just a few days earlier, a large membership organization of securities analysts proposed a variation on the same theme. The Association of Investment Management and Research proposed a system under which the analysts' risk assessments would be as widely available as their buy/sell ratings. An ideal solution would be for the SEC, analysts and auditors to work together cooperatively to develop a good risk reporting and assessment system, then make it available for investors, sort of like an analytical mate for EDGAR, the SEC's Electronic Data Gathering and Retrieval System. If the SEC will lead the way, others will surely follow.