(March 17) – The world’s leading securities regulator is warning that financial fraud has snuck into the world’s largest markets camouflaged as managed earnings, writes Sandra Rubin in today’s Financial Post.

Safety-Kleen Corp. may be the latest company to admit “improper revenue recognition” but pushing the envelope of aggressive accounting is far too common, according to Richard Walker, director of enforcement for the U.S. Securities and Exchange Commission. He says the trend risks undermining the integrity of the world’s most important market and the SEC has made rooting out fraud “its highest priority.”

“Mr. Walker says while companies like Bre-X Minerals Ltd., YBM Magnex International Inc. and Livent Inc. may be the poster children for market fraud, the real face may be more pervasive, more banal and far more troubling.

“Mr. Walker says too many publicly traded companies have found record earnings are no longer enough: those that fail to meet market expectations pay a swift and steep price. No longer do investors ride it out for the long run. These days, disappointed shareholders don’t hesitate to flee a stock at the first sign earnings will not meet expectations, wiping out tens of millions of dollars in market value in the process.

“In one of the strongest bull markets in history, companies are under unprecedented pressure to perform. The anecdotal evidence is scary. In a survey of CFOs at a Business Week conference last year, 55% said they had been asked to misstate earnings and 17% said they had done so. And 78% of those polled by CFO Magazine said they had been asked to bend accounting rules to present results in a better light.

“’I think it’s alarming that in the strongest of markets, we’re seeing the kind of cracks we’re seeing,’ Mr. Walker told a panel of lawyers and regulators attending a conference given by the Practicing Law Institute. ‘In a strong bull market the concern is even greater because, typically, this type of fallout occurs when the market dips and turns.’

“Michael Watson, director of enforcement with the Ontario Securities Commission, says Canadian firms are victims of the same pressures.

“’We don’t have any active investigations right now where the primary focus is number-smoothing but, that said, it’s not something we haven’t seen,’ Mr. Watson said. ‘There are cases where we have seen concerns about it but by the time we looked into the company, there were so many other concerns that smoothing wasn’t an issue worth taking up on its own.’”

Rubin goes on to describe some of the different ways of managing – “smoothing” – the numbers.