SEC’s ramped-up scrutiny means CFOs need to re-evaluate processes

CFOs and finance departments may want to undergo a careful evaluation of their financial reporting systems and processes, experts say, now that the US Securities and Exchange Commission (SEC) is ramping up its scrutiny of accounting and auditing.

After years of declining enforcement actions for financial fraud and issuer disclosure, the SEC’s Division of Enforcement has placed a new emphasis on accounting and auditing, announcing in July that it is forming a Financial Reporting and Audit Task Force.

The task force’s objective is to detect fraud and increase prosecutions of violations involving false or misleading financial statements and disclosures. This should prompt some self-scrutiny by financial executives and finance departments, according to Colleen Vallen, CPA/CFF, a partner and expert in fraud and forensic issues at accounting and consulting firm Citrin Cooperman in Philadelphia.

“Now is a time to take a step back and evaluate,” Vallen said during a Journal of Accountancy podcast. “Understand your financial reporting system. Understand any potential issues or red flags you have had in the past. And really explore those areas. What you do with that information will vary from company to company. But now is the time to focus on that, to take a step back.”

The SEC has several relatively new points of entry that could lead its enforcement staff to discover more cases of fraud. The commission’s whistleblower program, which started in August 2011, received 547 complaints related to corporate disclosures and financials in fiscal year 2012, which ended in September.

The task force will also review restatements and revisions of financial statements. And technology-based tools, such as the newly developed Accounting Quality Model, also may help the SEC identify companies whose financial statements differ substantially from those of their peers, prompting a closer look from the Division of Enforcement.

The Accounting Quality Model is a technology-based flexible modelling framework the SEC designed to help identify earnings management in financial reporting.

“They have the most extensive database of financial statements and filings, perhaps in the world,” said Harris L. Devor, CPA, a shareholder and forensic accountant with Shechtman Marks Devor PC in Philadelphia, who focuses on litigation services relating to accounting, auditing and SEC reporting issues. “It sounds like they’re going to use it in a proactive way to ascertain how companies differ from the norm, whether they appear to have aberrations compared to where other companies in their niche seem to fall.”

CFOs can take steps to ensure they are vigilant for fraud and minimise their risk, according to Syril Mathai, CPA, vice president for global services and partner enablement at financial software company Trintech, which helps companies implement technology to prevent fraud. He said CFOs can:

  • Take the time to probe. CFOs are busy participating in strategic conversations as well as managing companies’ investments and capital. But the potential cost of a fraud accusation makes it imperative for CFOs to pay close attention to the financials.

    “They’ve got to take time and say, ‘I do have to take a portion of my time in a month to ensure that proper time is spent with my executives and teams underneath to make sure that integrity is there,’ ” Mathai said.
  • Get visibility. Are reconciliations done? Was the close process performed appropriately? Have the controls been documented and attested to? Mathai said these are questions CFOs need to examine, rather than just relying on their staffs for monitoring.

    If gaps in integrity are uncovered, CFOs need to ask why, Mathai said. It’s possible that an educational or resource issue could be at fault rather than malicious conduct on the part of an employee.

    “They’ve got to be willing to ask those questions,” Mathai said.
  • Maintain accountability. CFOs should hold their staffs to the same level of accountability that the CFO faces, Mathai said. That includes rewarding the staff for a job performed well – which Mathai defines as financials that accurately depict the business’s situation, for better or for worse.

    “Letting teams know the prize that comes with having financials that tell the correct story, that’s going to go a long way,” he said.

It’s not good enough, Mathai said, for finance and accounting to just follow a process. He said the whole staff needs to make sure that documentation ensures consistency and quality, and that the work conforms to company accounting policies and is consistent with the way the business is run.

Devor said some of the most common areas where accounting fraud is found haven’t changed for many years. These include accelerated revenue recognition and capitalising expenses as costs.

“Management of companies has to show that once those things are brought to their attention, that they intend to bring prompt and appropriate action,” he said. “That is, after all, they must take them seriously, they must investigate them fully, and if in fact the allegations have substance, they have to remedy the problems promptly as they occur. And that reinforces in the company a tone at the top that bad behaviour in this realm will not be tolerated.”

CFOs and finance staffers would be wise to review policies, procedures and systems now, Vallen said.

“Look at your business,” she said. “Have you had a restatement in the past? If so, do you understand why? What changes have you made in response to that? And look at risk areas. Do you have a specific risk area that you haven’t addressed? And I think, look at any red flags that you may have identified. Talk to your finance people. Talk to your accounting people, your resources. And evaluate now if there are things you think you need to focus on or change.”

Ken Tysiac ( is a CGMA Magazine senior editor.