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Greater Responsibility for Accountants After SEC v. Harrisburg

Government-employed accountants must exercise greater care in the wake of the Securities and Exchange Commission’s proceeding against the city of Harrisburg, Pa., writes J. Edward Ketz, associate professor of accounting at the Penn State Smeal College of Business, in a forthcoming paper.
November 4, 2013

Government-employed accountants must exercise greater care in the wake of the Securities and Exchange Commission’s proceeding against the city of Harrisburg, Pa., writes J. Edward Ketz, associate professor of accounting at the Penn State Smeal College of Business, in a forthcoming paper.

The SEC’s action against Harrisburg has implications for county, city, and state governments that extend beyond officially filed documents into publicly available statements and information.

“What makes the case interesting is that the SEC examined assertions by city officials in documents other than SEC filings.”

In May 2013, the SEC filed charges against the city for issuing fraudulent public statements. At the time, Harrisburg was near bankruptcy and Moody’s had downgraded its credit rating. After a two-year probe into the city’s financial disclosures, the SEC had found misleading information and omissions regarding the city’s financial position.

But, writes Ketz, “What makes the case interesting is that the SEC examined assertions by city officials in documents other than SEC filings.”

According to Ketz, between 2009-2011 the city of Harrisburg stopped supplying required financial statements to the SEC. In the absence of officially submitted documents, the SEC examined other publicly available information produced by the city, such as its 2009 budget, the state of the city address, and a mid-year fiscal report—all of which were publicly available on the city’s website.

“The SEC declared that these three items misstated the financial condition of the city by describing a rosier position than actually existed chiefly by not disclosing payments on guaranteed debt already made and likely to be made in the near future. The budget also misstated the credit rating by listing the better and no-longer-true rating,” writes Ketz.

“This expands the professional responsibilities of accountants, who must be careful not to issue misleading statements in these or similar documents."

That the SEC took into account documents that were not official filings indicates that any and all public statements issued by governmental entities—including accountants and controllers—must be diligently examined for correctness and completeness. These documents include budgets, financial evaluations, mid-year assessments, and public speeches.

“This expands the professional responsibilities of accountants, who must be careful not to issue misleading statements in these or similar documents. Legal liability may extend to them if the statements are found to be fraudulent,” writes Ketz.

Ketz’s essay, “SEC v. Harrisburg: What Are The Issues?” is forthcoming in The CPA Journal.

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