Posts Tagged ‘Audits’

Monitoring the Monitors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 22, 2014 at 9:05 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at Harvard Business School; and Andrea Hugill of the Strategy Unit at Harvard Business School.

Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, our paper, Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors, which was recently made publicly available on SSRN, theorizes and tests the factors that shape the practices of private supply chain auditors. We find that audits are conducted most stringently by auditors who are experienced and highly trained, and by audit teams that include female auditors. By contrast, auditors that have ongoing relationships with audited factories, and all-male audit teams conduct more lax audits, identifying and citing fewer violations. These findings make five key contributions and suggest strategies for designing audit regimes to more effectively detect and prevent corporate wrongdoing.

…continue reading: Monitoring the Monitors

A New Tool to Detect Financial Reporting Irregularities

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 9, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Dan Amiram and Ethan Rouen, both of the Accounting Division at Columbia University, and Zahn Bozanic of the Department of Accounting and MIS at Ohio State University.

Irregularities in financial statements lead to inefficiencies in capital allocation and can become costly to investors, regulators, and potentially taxpayers if left unchecked. Finding an effective way to detect accounting irregularities has been challenging for academics and regulators. Responding to this challenge, we rely on a peculiar mathematical property known as Benford’s Law to create a summary red-flag measure to capture the likelihood that a company may be manipulating its financial statement numbers.

…continue reading: A New Tool to Detect Financial Reporting Irregularities

A Few Things Directors Should Know About the SEC

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday June 27, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.

So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.

…continue reading: A Few Things Directors Should Know About the SEC

PCAOB Adopts New and Amended Auditing Standards

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday June 22, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Michael Scanlon, partner in the Securities Regulation and Corporate Governance and Corporate Transactions practice groups at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. Scanlon.

On June 10, 2014, The Public Company Accounting Oversight Board (“PCAOB”) adopted new and amended auditing standards that expand audit procedures required to be performed with respect to three important areas: (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers. The standards also expand the required communications that an auditor must make to the audit committee related to these three areas. They also amend the standard governing representations that the auditor is required to periodically obtain from management.

…continue reading: PCAOB Adopts New and Amended Auditing Standards

The PCAOB Proposed Auditor’s Reporting Model

Posted by Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP, on Friday May 9, 2014 at 9:02 am
  • Print
  • email
  • Twitter
Editor’s Note: Alan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on Mr. Beller’s testimony at the Public Company Accounting Oversight Board’s (PCAOB) public hearing in Washington, D.C. on proposed enhancements to the auditor’s reporting model; the complete text is available here. The views expressed in his testimony are based on his knowledge and experience as both a government official and a legal advisor to private clients.

The proposed enhancements to the auditor’s reporting model would be the first change to the standards in more than 70 years. Furthermore, they could significantly impact the content and format of auditors’ reports; the treatment of that information by investors and other users of financial statements; and the relationship and structure of interactions among management, audit committees and auditors as they have developed since the enactment of the Sarbanes-Oxley Act of 2002.

…continue reading: The PCAOB Proposed Auditor’s Reporting Model

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

Selected Issues for Boards of Directors in 2014

Posted by Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP, on Saturday February 1, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: Alan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.

During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.

…continue reading: Selected Issues for Boards of Directors in 2014

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

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

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