SEC's Next Target: 'Reckless' Board Members

The next group to be targeted in the SEC's ramped up effort to stop corporate fraud will be corporate directors who do not exercise their fiduciary responsibility to the investing public, according to the SEC's top enforcement official.

Since the Enron collapse, the SEC has brought enforcement proceedings against a variety of groups, including accounting firms, management, auditors, and investment banks. But now, Stephen Cutler, the SEC's Chief Enforcement Officer, says that a current case in Boston against an outside Board member is being viewed as a model for future proceedings.

The case targets Rudolph Peselman, a former outside director and member of the audit committee of Boston-based Chancellor Corp., a transportation equipment leasing company. The case alleges that Mr. Peselman was presented with information that should have alerted him to possible accounting irregularities but he failed to act on that information. As a result, the case alleges, the company overstated revenue in 1998 by over 175%.

At issue is the fact that the company replaced its outside auditor because the auditor didn't agree with the way revenue was recognized, and found another auditing firm that would sign-off on the financial statements. Also involved were over $1 million in payments to related party entities controlled by the company CEO. The SEC alleges that Peselman knew about the reason for changing auditors, yet still approved the financial statements, resulting in a "complete neglect of his duties as a director and an audit committee member."

"This case signifies the commission's willingness to pursue cases against outside directors who were reckless in their oversight of management and asleep at the switch," said Stephen Cutler.

"This is definitely a sign of things to come," said Harvey Pitt, the former SEC chairman who now heads Kalorama Partners, a Washington-based consulting firm. "The commission has made it clear it wants outside directors to uphold the highest standards. This case definitely shows the agency's determination to go after them."

You may like these other stories...

A proposal issued by the Governmental Accounting Standards Board (GASB) last week explains how fair value measurement should be defined for state and local government financial reporting.The exposure draft, Fair Value...
By Jason Bramwell The board of trustees of the Financial Accounting Foundation (FAF) finalized a new policy on November 19 that provides the Governmental Accounting Standards Board (GASB) with direction on what...
By Jason Bramwell The Governmental Accounting Standards Board (GASB) is now offering a free online toolkit designed to assist preparers and auditors of state and local government pension plans with implementing new...

Already a member? log in here.

Upcoming CPE Webinars

Sep 18
In this course, Amber Setter will shine the light on different types of leadership behavior- an integral part of everyone's career.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.