Posts Tagged ‘Accounting’

The Misrepresentation of Earnings

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday April 3, 2014 at 9:12 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Ilia Dichev, Professor of Accounting at Emory University; John Graham, Professor of Finance at Duke University; Campbell Harvey, Professor of Finance at Duke University; and Shivaram Rajgopal, Professor of Accounting at Emory University.

While hundreds of research papers discuss earnings quality, there is no agreed-upon definition. We take a unique perspective on the topic by focusing our efforts on the producers of earnings quality: Chief Financial Officers. In our paper, The Misrepresentation of Earnings, which was recently made publicly available on SSRN, we explore the definition, characteristics, and determinants of earnings quality, including the prevalence and identification of earnings misrepresentation. To do so, we conduct a large-scale survey of 375 CFOs on earnings quality. We supplement the survey with 12 in-depth interviews with CFOs from prominent firms.

…continue reading: The Misrepresentation of Earnings

SEC Institutes Administrative Proceedings Against KPMG For Auditor Independence Violations

Posted by Lee A. Meyerson, Simpson Thacher & Bartlett LLP, on Saturday March 1, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: Lee A. Meyerson is a Partner who heads the M&A Group and Financial Institutions Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Avrohom J. Kess, Karen Hsu Kelley, and Yafit Cohn.

On January 24, 2014, the Securities and Exchange Commission (“SEC”) issued an order instituting settled administrative and cease-and-desist proceedings against KPMG LLP (“KPMG”) for violating auditor independence rules in its relationships with affiliates of three of its SEC-registered audit clients. [1] At the crux of the SEC’s order are its findings that:

  • KPMG provided prohibited non-audit services to affiliates of its audit clients;
  • KPMG hired a former employee of an affiliate of one of KPMG’s audit clients and subsequently loaned him back to the affiliate to do the same work he had done as an employee of the affiliate;
  • Certain KPMG employees owned stock in KPMG’s audit clients or affiliates of its audit clients; and
  • KPMG repeatedly represented in its audit reports that it was “independent.”

KPMG settled the charges for approximately $8.2 million.

…continue reading: SEC Institutes Administrative Proceedings Against KPMG For Auditor Independence Violations

SEC Investigations and Enforcement Related to Financial Reporting and Accounting

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday February 16, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Randall J. Fons, partner and co-chair of the Securities Litigation, Enforcement, and White-Collar Defense Group and the global FCPA and Anti-Corruption Task Force at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Fons.

“One of our goals is to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”
— Mary Jo White, Chair of the SEC, October 9, 2013

“In the end, our view is that we will not know whether there has been an overall reduction in accounting fraud until we devote the resources to find out, which is what we are doing.”
— Andrew Ceresney, Co-Director of the SEC Division of Enforcement, September 19, 2013

“The SEC is ‘Bringin’ Sexy Back’ to Accounting Investigations”
New York Times, June 3, 2013

Much has changed since the collapse of Enron in 2001 and the ensuing avalanche of financial fraud cases brought by the SEC. For example, Sarbanes-Oxley raised auditing standards, imposed certification requirements on public company officers and required enhanced internal controls for public companies. The Public Company Accounting Oversight Board (PCAOB) was formed “to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit
reports.” [1] In pursuit of that goal, the PCAOB has conducted hundreds of audit firm inspections, adopted numerous auditing standards and brought dozens of enforcement actions against auditors for violating PCAOB rules and auditing standards.

…continue reading: SEC Investigations and Enforcement Related to Financial Reporting and Accounting

The SEC’s Refocus on Accounting Irregularities

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 27, 2014 at 9:14 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article by Mr. Ferrillo, Christopher Garcia, and Matthew Jacques of AlixPartners that first appeared in D&O Diary.

On July 2, 2013, the United States Securities and Exchange Commission (the SEC) announced two new initiatives aimed at preventing and detecting improper or fraudulent financial reporting. [1] We previously noted that one of these initiatives, a computer-based tool called the Accounting Quality Model (AQM, or “Robocop”), [2] is designed to enable real-time analytical review of financial reports filed with the SEC in order to help identify questionable accounting practices.

…continue reading: The SEC’s Refocus on Accounting Irregularities

Do Managers Manipulate Earnings Prior to Management Buyouts?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 17, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Yaping Mao and Luc Renneboog, both of the Department of Finance at Tilburg University.

In the paper, Do Managers Manipulate Earnings Prior to Management Buyouts?, which was recently made publicly available on SSRN, we investigate accounting manipulation prior to buyout transactions in the UK during the second buyout wave of 1997 to 2007. Prior to management buyouts (MBOs), managers have an incentive to deflate the reported earnings numbers by accounting manipulation in the hope of lowering the subsequent stock price. If they succeed, they will be able to acquire (a large part of) the company on the cheap. It is important to note that accounting manipulation in a buyout transaction may have severe consequences for the shareholders who sell out in the transaction: if the earnings distortion is reflected in the stock price, the stock price decline cannot be undone and the wealth loss of shareholders is irreversible if the company goes private subsequent to the buyout. Mispriced stock and false financial statements are still issues frequently mentioned when MBO transactions are evaluated. The UK’s Financial Services Authority (FSA, 2006) ranks market abuse as one of the highest risks and suggests more intensive supervision of leveraged buyouts (LBOs). The concerns about mispriced buyouts are therefore a motive to test empirically whether earnings numbers are manipulated preceding buyout transactions.

…continue reading: Do Managers Manipulate Earnings Prior to Management Buyouts?

Regulating the Timing of Disclosure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 10, 2013 at 9:15 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Lisa Bryant-Kutcher of the Department of Accounting at Colorado State University, Emma Peng of the Accounting Area at Fordham, and David Weber of the Department of Accounting at the University of Connecticut.

In our paper, Regulating the Timing of Disclosure: Insights from the Acceleration of 10-K Filing Deadlines, forthcoming in the Journal of Accounting and Public Policy, we examine how regulatory reforms that accelerate 10-K filing deadlines in 2003 affect the reliability of accounting information. The intended purpose of the new deadlines is to improve the efficiency of capital markets by making accounting information available to market participants more quickly. However, accelerating filing deadlines compresses the time available for firms and their auditors to prepare, review, and audit accounting reports, suggesting potential costs in the form of increased misstatements and lower reliability. We provide empirical evidence on the effects of accelerating deadlines by comparing the likelihood of restatement of 10-K filings before and after the rule change.

…continue reading: Regulating the Timing of Disclosure

The Effect of Audit Committee Expertise on Monitoring Financial Reporting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 5, 2013 at 9:10 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Udi Hoitash, Ganesh Krishnamoorthy, and Arnold Wright, all of the Accounting Group at Northeastern University, and Jeffrey Cohen, Professor of Accounting at Boston College.

In our paper, The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process, forthcoming in The Accounting Review, we examine the impact of audit committee (AC) industry expertise on the AC’s effectiveness in monitoring the financial reporting process. Despite the increased responsibilities, authority, independence, and financial expertise requirements placed on ACs by the Sarbanes-Oxley Act (SOX), ACs may, nonetheless, lack sufficient industry expertise to understand and thus properly monitor complex industry specific accounting issues. For instance, expertise in the retail industry may assist ACs to ensure that companies take an adequate write-down of inventory when their products face potential obsolescence. Similarly, revenue recognition, a prominent area of accounting manipulation (Beasley et al. 2000, 2010), entails an evaluation and understanding of the earnings process, which is tied to a company’s business processes that are often industry specific.

…continue reading: The Effect of Audit Committee Expertise on Monitoring Financial Reporting

Achieving High Quality Audits to Promote Integrity and Investor Protection

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 16, 2013 at 9:06 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Jeanette M. Franzel, board member of the Public Company Accounting Oversight Board. This post is based on Ms. Franzel’s remarks at the NACD 2013 Board Leadership Conference, available here. The views expressed in this post are those of Ms. Franzel and should not be attributed to the PCAOB as a whole or any other members or staff.

I want to commend the NACD on its mission to “advance exemplary board leadership” with the compelling vision of aspiring to “a world where businesses are sustainable, profitable, and trusted; shareowners believe directors prioritize long-term objectives and add unique value to the company; [and] directors provide effective oversight of the corporation and strive to deliver exemplary board performance.”

Audit committees are instrumental in achieving this vision and maintaining public trust and investor protection through their oversight of corporate financial reporting and auditing. I would also like to recognize the important role and difficult jobs that each of you have as audit committee members in these oversight functions, as well as the many other areas that are being assigned to audit committees during a time of ever increasing business complexity and risk.

…continue reading: Achieving High Quality Audits to Promote Integrity and Investor Protection

Does Fair Value Accounting Contribute to Procyclical Leverage?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 13, 2013 at 9:19 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Amir Amel-Zadeh of Judge Business School at the University of Cambridge; Mary Barth, Professor of Accounting at Stanford University; and Wayne Landsman, Professor of Accounting at the University of North Carolina.

Many academic researchers, policy makers, and other practitioners have concluded that fair value accounting can lead to suboptimal real decisions by firms, particularly financial institutions, and result in negative consequences for the financial system. This conclusion is sustained by the belief that fair value accounting was a major factor contributing to the 2008-2009 financial crisis by causing financial institutions to recognize excessive losses, which in turn caused excessive sales of assets and repayment of debt, thereby leading to procyclical accounting leverage. Leverage is procyclical when it decreases during economic downturns and increases during economic upturns. In our paper, Does Fair Value Accounting Contribute to Procyclical Leverage?, which was recently made publicly available on SSRN, we examine whether there exists any link between fair value accounting and procyclical accounting leverage.

To address this question, we develop a model of commercial bank actions taken in response to economic gains and losses on their assets throughout the economic cycle to meet regulatory leverage requirements. We focus on commercial banks because of the central role they play in the financial system and the allegation that their actions in response to fair value losses contributed to the financial crisis. Our model and empirical tests based on the model establish that procyclical accounting leverage for commercial banks only arises because of differences between regulatory and accounting leverage, and not because of fair value accounting.

…continue reading: Does Fair Value Accounting Contribute to Procyclical Leverage?

Implications of Recent Developments in SEC Enforcement

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday October 26, 2013 at 9:02 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Michael D. Trager, senior partner at Arnold & Porter LLP and chair of the firm’s Securities Enforcement Practice. This post is based on an Arnold & Porter memorandum.

In the six months since Mary Jo White was sworn in as the Securities and Exchange Commission’s 31st Chairman, the SEC has announced important new policies and initiatives as the agency has begun to utilize new enforcement authority under the Dodd-Frank Act and to redeploy resources. In recent weeks, White and Andrew Ceresney, Co-Director of the Division of Enforcement, have made important public announcements regarding enforcement priorities. Taken together, these policies, initiatives, and announcements signal a shift toward more aggressive enforcement. This advisory discusses these developments.

Approach to Enforcement

From the time of her nomination, White stressed that the SEC would take an aggressive approach to enforcement under her leadership. At her March 12, 2013 confirmation hearing, White pledged that one of her highest priorities as Chairman would be “to further strengthen the enforcement function of the SEC” in a way that is “bold and unrelenting.” White also stated that the SEC would pursue “all wrongdoers – individual and institutional, of whatever position or size” in order to deter wrongdoing and protect the integrity of financial markets. [1]

…continue reading: Implications of Recent Developments in SEC Enforcement

Next Page »
 
  •  » A "Web Winner" by The Philadelphia Inquirer
  •  » A "Top Blog" by LexisNexis
  •  » A "10 out of 10" by the American Association of Law Librarians Blog
  •  » A source for "insight into the latest developments" by Directorship Magazine