Wednesday, December 17, 2014

SEC and the Quants: Will RoboCop get a BigData overhaul?

As reported in this Forbes article in 2013, the SEC began to use so-called RoboCop to assist with their regulatory duties.

Who is RoboCop?

No, it's not that infamous crime-fighting cyborg from the late-80s (coincidentally remade in 2014). It is actually the Accounting Quality Model (AQM) - not quite as exciting I know. According to Forbes:

"AQM is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM, in conjunction with statements by recently-confirmed SEC Chairman Mary Jo White and the introduction of new initiatives announced July 2, 2013, indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit."

Another interesting point raised by the Forbes article is the use of XBRL in this accounting model: "AQM relies on the newly-mandated XBRL data which is prone to mistakes by the inexperienced. Sloppy entries could land your company’s filing at the top of the list for close examination."

(On a side note: AICPA has published this study to assist XBRL filers ensure that they are preparing quality statements, given that there are many possible errors; as noted in this study).

Within this context, we should take note of how the SEC is hiring "quantitative analysts" (or "quants" for short). As noted in this WSJ article:

"And Wall Street firms, for their part, are able to offer quantitative analysts—or “quants”—far higher pay packages than the regulator. The SEC’s access to market data also remains limited. In 2012, it approved a massive new computer system to track markets, known as the Consolidated Audit Trail, but the system isn’t likely to come online for several years, experts say."

Could the SEC pull a fast one and become the source of innovation? Although the WSJ article seems to downplay the possibility that the SEC can outpace the firms, it is not something that the audit industry can ignore.

As noted in a previous post on Big Data, it was just this type of mindset that Mike Flowers of New York City looked to revolutionize how the NYC leveraged big data to improve its "audit" of illegal conversions. Perhaps the SEC may follow in his stead.

No comments: