Claims that the SEC is more lenient towards companies who make voluntary disclosures are overstated, according to a new study
Dear readers,
It is a common refrain and one that we have been hearing for a long time, but the problem is, it just isn’t true. What am I talking about? The SEC’s claim that voluntary disclosure of violations or misconduct means you are less likely to get in trouble with the regulatory agency. Inherently we have always known this isn’t true, but something in us fights against our logical selves and makes us want to believe. Just like we did when our parents fed us that classic line, ‘If you tell the truth, you won’t get in trouble.’ Ha, I spent many an afternoon confined to my room because of some admission or another. It’s disappointing when a respected figure deceives you, but at least I still love my parents. The jury is out on the SEC.
Now we have some firm data to prove the SEC’s claims of leniency are, if not untrue, then definitely overstated. A very interesting report from the University of Texas examines more than 1,200 financial restatements over an eight-year period. Rebecca Files, professor of business, who conducted the study, finds that companies that conduct internal investigations and make voluntary disclosures actually have a higher likelihood of receiving sanctions from the SEC.
The study is by no means definitive in that it only looks at a limited range of misconduct that leads to financial restatements, but it does shed light on an important dilemma that all companies face: to conduct an investigation and share the findings openly or to keep things to yourself. The upside to disclosure is that, while enforcement action may be more likely, the punishment is less. Try to conceal that violation or delay disclosure, and it is likely things will be a lot worse. It was exactly the same when dealing with my parents. Maybe my Dad should go to work for the SEC.
Cooperation can be beneficial, but there are risks. Many of you are probably thinking ‘I won’t have to worry about this,’ but don’t kid yourself. The SEC is pumping a lot of resources into its enforcement division. It is already the largest section of the Commission by some margin. There is also considerable political motivation to bring forth as many cases as possible given previous high-profile failures to detect and prevent wrongdoing.
On top of this, enforcement division officers have the power to issue subpoenas, a tool they received last year on an experimental basis, which the SEC just voted to make permanent.
So be careful. Cooperation may seem like the easy option, but the easy way is not always the best way. Hopefully you run a squeaky-clean kitchen and won’t have to face this dilemma, but let’s face it, most of you will.
Don’t fret too much. If you find yourself in need of guidance or advice, you can always turn to the newly revamped Corporate Secretary website. We have spent a lot of time on it and think you will find it most useful. You will find content from the last eight years – has it really been that long? – organized into easy-to-search categories. We have advice from leading experts and from your corporate peers, so it is well worth a visit. Check it out at www.corporatesecretary.com
Something else that I am very excited about, and you should be too, is the new survey series we are conducting with Stanford’s Rock Center for Corporate Governance. The aim is to get some hard data and research on what companies are actually doing and hopefully figure out once and for all what elements of governance reform actually lead to improvements and which do not. This will be powerful information to present to your boards and management. So keep an eye out for the next survey email and try to find 10 minutes to respond. It will help you and all your friends at other listed companies. In fact, if you have a moment right now, click here for the first one.
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Please send me your thoughts and comments on these or any other topics.
Brendan Sheehan
Executive editor
Corporate Secretary
