SEC to roll out 'RoboCop' against fraud

The Securities and Exchange Commission is deploying a new computerised tool to automatically trigger alerts concerning suspicious accounting

Story highlights

  • SEC has new tool alerting suspicious accounting practices
  • Regulator plans to roll out the early warning system this year
  • Tool reads so-called "XBRL tags" increasingly being attached to financial data

US finance chiefs beware: accountancy's answer to RoboCop will soon be watching you.

The Securities and Exchange Commission is deploying an innovative computerised tool designed to automatically trigger alerts concerning suspicious accounting at publicly traded companies.

The regulator plans to roll out the early warning system this year, saying it will mine a "rich vein of information" continuously supplied by companies through official filings such as annual reports.

The tool is one of the boldest uses so far of the computer-readable "XBRL tags" that are increasingly being attached to financial data around the world to enable easier comparisons between businesses.

Craig Lewis, director of the SEC's division of risk, strategy and financial innovation, said it would be about nine months before it was rolled out, although it could appear sooner.

The data-mining software is partly based on a model the SEC developed to trawl through hedge fund returns for signs of Bernard Madoff-style chicanery.

The accounting version will analyse whether a company "sticks out from the pack" in areas such as accruals, which are non-cash entries that can be manipulated by management.

Other factors that might raise red flags include a high proportion of off-balance-sheet transactions, frequent changes in auditor and delays to earnings announcements.

"When firms are choosing accounting treatments that are unusual -- that's something we would like to highlight [for SEC examiners]," said Mr Lewis, a former finance professor who is also the SEC's chief economist.

Tracking such practices will primarily give the SEC a sense of the riskiness of a particular company relative to its peers.

Mr Lewis hopes the system will flag up the odd crime too: "My hope is that we'll turn over a number of accounting fraud cases."

The accounting monitoring model is being developed by a team of about a dozen people at Mr Lewis's division, which was created in 2009 to act as the SEC's think-tank.

"It has been entirely done on a shoe string," Mr Lewis said, describing it as a significant extension of existing academic research nonetheless.

Such a monitoring tool has only become possible for the SEC following a phased introduction of a mandatory XBRL tagging requirement for listed companies that follow US accounting rules.

Trevor Harris, a professor and XBRL specialist at Columbia Business School, said the initiative showed the potential for pre-emptive enforcement: "I think of it more as fraud prevention than fraud detection."

Initial problems with the reliability of XBRL data would ease over time, Prof Harris added.

Tony Fragnito, chief executive of XBRL International, which sets the XBRL standards, said securities regulators in other countries such as Japan, China and Australia were taking a similar approach to the SEC.