By Katelyn Polantz, From Legal Times

The list sounds Santa Clausian, if it hadn’t come from the U.S. Securities and Exchange Commission’s Financial Reporting and Audit Task Force.

The group, known by corporate America and in Big Law for tracking accounting fraud since its 2013 founding, keeps a working list of companies that the agency might investigate.

The list is part of a recent strategy from the SEC to crack down on companies with subpar internal financial controls.

Companies on the list comes from a variety of sources, according to David Woodcock, a Texas-based SEC regional director and the chairman of the audit task force. His group within the agency looks for lawsuits filed against companies alleging accounting fraud, or other tipoffs in the court system or media.

Once a company appears on the list, the SEC assigns an accountant and an attorney to review the facts. They’re systematic about it, using a checklist to walk through all the reasons why a company may be worth investigating.

“This involves a question of judgment,” Woodcock said. Sometimes, the SEC will remove a company from the list, or it will allow it to “incubate” on the list, he said.

At this point, the financial-reporting audit task force may ask a company for more information.

“In almost all of the cases we’ve done, the company will come in and tell us why this is not a problem,” Woodcock said.

The companies, sometimes with outside counsel and sometimes without, deliver a presentation to the regulators. Not all strategies work, Woodcock said, encouraging transparency as the most effective approach.

“I find the most ineffective is when the lawyer is talking all the time,” he said.

If a company still peaks the SEC’s interest, Woodcock said the case then moves to the agency’s Enforcement Division.

Woodcock explained the process at a briefing last week regarding recent trends in securities litigation and enforcement.

PricewaterhouseCoopers released a trend report at the briefing, too: The SEC has increased the number of reporting and disclosure legal actions against companies—up 46 percent from fiscal year 2013. The accounting firm reported the SEC brought 99 enforcement actions of this type in fiscal year 2014. On the whole, the agency filed 755 enforcement cases last year.

Jeffrey Knox, former head of the fraud section at the U.S. Department of Justice and now a Simpson Thacher & Bartlett partner, added that his former employer has also focused on rooting out accounting fraud, after facing criticism for being too soft on financial-services companies after the recession.

IMAGE: U.S. Securities and Exchange Commission. Photo: Diego M. Radzinschi/NLJ

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