The U.S. Securities and Exchange Commission's latest annual enforcement report hints that the agency is shifting its focus away from traditional corporate disclosure statements and looking more closely at the internal financial data that typically comes up during earnings calls. Such data wouldn't necessarily be part of a company's formal accounting.

“You're seeing more cases that are really honed in on the operating metrics and financial goals of the company,” said Gerald Hodgkins, a former associate director of the SEC's enforcement division. He's now a partner at Covington & Burling in Washington, D.C., where he specializes in securities litigation and enforcement.

“These newer cases are focused on particular operating goals, operating metrics,” he added. “It has increasing emphasis by the SEC's division of enforcement.”

Walgreens and a pair of the pharmaceutical store chain's former executives are well aware of that “increasing emphasis.” In late September, the SEC announced that Walgreens would pay $35.5 million to settle an enforcement action alleging that it had duped investors into thinking a merger would lead to about $9 billion in adjusted operating income. But Walgreens' internal analysis showed that the company would likely fall far short of that financial goal, according to the SEC.

Not only did Walgreens pay a penalty, but its former CEO and CFO were each required to shell out $160,000 as part of the settlement.

“As this case shows, we are committed to holding corporate executives accountable when they are in the best position to ensure that disclosures are accurate and not misleading,” Melissa Hodgman, associate director of the SEC's enforcement division, said in a statement at the time.

On the same day of the Walgreens announcement, the SEC also reported it had reached a settlement in a similar case against Salix Pharmaceuticals and its former CEO for allegedly lying to analysts and investors during earnings calls.

But why did the agency shift its focus? The answer ties into the SEC's push to protect individual investors, according to Hodgkins.

“There's an appreciation by the current leadership at the SEC that operating metrics or financial goals are important to investors,” he said. “It's also important to send a message to public companies that they need to focus on this area and make sure the metrics and financial information they provide is accurate.”

The SEC's recent enforcement activity also shows that the agency isn't easing up when it comes to individual accountability. Aside from taking action against execs in the Walgreens and Salix cases, this year the SEC also required Tesla CEO Elon Musk to resign as chairman for posting a misleading Twitter statement about taking the company private. And it forced Theranos CEO Elizabeth Holmes to relinquish voting control over the now-defunct blood-testing company for allegedly tricking investors.   

“They're doing what they should be doing,” Charles Elson, a professor of corporate governance at the University of Delaware, said of the SEC. “The only way you're going to have adherence to the securities law in a transparent securities market is when the SEC takes action against those who have not lived up to the compliance of the law.”

The SEC pursued more enforcement actions this fiscal year than 2017, going from 754 cases to 821. But, at the same time, the amount of money that the agency recovered in disgorgement and penalties dropped.

An analysis from The New York Times showed that recoveries went from more than $2.6 billion in 2016 to nearly $1.9 billion last year to about $1.1 billion this year. The SEC used a different calculation and reported recovery totals for the same three years in the same order as $4.08 billion, $3.7 billion and $3.9 billion, respectively. 

“The biggest takeaway is that corporate penalties are down,” said Ken Joseph, a managing director at Duff & Phelps in New York and former head of the SEC's New York regional office investment management examination program. As a possible explanation, he cited a 10 percent reduction of employees and contractors at the SEC as part of a hiring freeze that began in 2016.

Looking ahead to next year, Joseph predicted that the SEC will continue to keep an eye on retail investors and push for individual responsibility in its enforcement actions. He also believed that the agency would ramp up its use of data analytics to detect potential misconduct before launching full-blown investigations.

In one recent case, the SEC relied on data analysis technology to detect suspicious trading patterns, which led to charges against a New Jersey broker accused of raking in at least $700,000 by defrauding his clients.  

“This is, quite frankly, a game changer that will continue to evolve,” Joseph said.

Read more: