Insight

SEC EPS Investigations

SEC’s focus on earning management and data-driven investigations is here to stay

Chris Schneider

Chris Schneider

Managing Director, Forensic Dispute Advisory Services, KPMG LLP

614-249-1893

Diana Tani, an assistant regional director with the SEC, recently spoke at the Securities Enforcement West web conference and re-emphasized the agency's focus on data-driven investigations. Recent data-based enforcement actions suggest that the SEC is targeting quarterly public filings with a focus on manipulations to achieve earnings per share (EPS) estimates as quarterly reports are not subject to the same accounting oversight and scrutiny as annual reports. More specifically, the SEC has indicated its data analytics are identifying relatively small manipulations to figures that can have an outsized effect causing a company to appear they are meeting analysts' EPS expectations and/or attaining other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks.

KPMG Forensic has significant experience working with internal and external counsel on SEC inquiries and investigations, including a number of recent “EPS rounding” investigations currently in front of the SEC. We can assist with independent investigations on behalf of a company’s audit committee as part of these regulatory matters.

It is our understanding and experience that the SEC appears to be very engaged and more willing to do the detailed work (journal entry trend analysis, process owner interviews, formal testimony, etc.) than we have seen in past investigations. As KPMG Forensic, our role as an unbiased and objective forensic accountant is critical to navigating not only the underlying accounting issues and internal control considerations but also in assisting with conducting an effective internal investigation to satisfy various stakeholders (SEC, external auditors, audit committee, board of directors, etc.). 

In addition to typical forensic accounting analyses and participating in interview and email review, KPMG has dedicated teams focused on internal controls that can assist companies with remediation of its internal control environment, financial reporting processes, and internal audit strategy as part of a company’s overall response to regulators and external auditors. The SEC is very interested in understanding a company’s underlying processes and controls, supporting documentation to evidence management judgment, as well as remedial actions they are taking to close gaps in controls and processes identified as part of the internal investigation. KPMG brings the relevant experience to the table to support counsel in these investigations.