Market downturns have a way of exposing accounting frauds

By Joseph McCafferty

May 25, 2016

Warren Buffet, the king of folksy, one-liner investment aphorisms, has one for the problems that a bear market can cause: "It's only when the tide goes out that you can see who has been swimming without their trunks on."

For the last seven years or so, companies have been swimming in a rising market tide with only some minor ebbs and flows along the way. But we all know that bull markets don't last forever, and this one is likely running on borrowed time. So what should we expect when the stock market retreats? If history is any judge, expect a raft of accounting troubles and scandals.

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Regulator weighs in on use of unsanctioned accounting measures, amid uproar

By Joseph McCafferty

May 24, 2016

The fury over the increasing use of non-GAAP accounting measures when companies report earnings is building, and now the Securities and Exchange Commission is weighing in with some guidance on practices that are and aren’t acceptable.

As part of its published Compliance & Disclosures Interpretations guidance, the SEC issued a series of questions and answers that may come up as companies consider releasing non-GAAP measures. The guidance also serves as a warning to companies to use caution when using non-GAAP measures.

 

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Part three of our series, Building the Modern Corporate Risk-Assurance Function

By Matt Kelly

May 18, 2016

Risk assurance executives—whether they work in compliance, internal audit, risk management, IT security, or any other related function—ultimately worry about three things as they do their jobs.

  • Is everything functioning normally?

  • Do I understand how to address anything not functioning normally?

  • Am I working effectively with everyone else in the organization who helps fulfill my goals?

Those three questions, for example, invoke all five elements of the COSO internal control framework: risk assessment, the control environment, and monitoring (the first question); control activities (the second question); and communication (the third question). Those questions seek to understand what is normal and abnormal, and whether you can respond to events properly as the need arises. In one way or another, we all ask ourselves these questions every day.

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The price of worldwide corruption is rising for those that get caught…and those that don’t

By Joseph McCafferty

May 17, 2016

Companies are paying a huge price for worldwide corruption and bribery, even if they are adopting practices to fight against it. That's because the cost of corruption takes many forms, including loss of business to less scrupulous companies, regulatory requirements, and lost opportunities in regions where corruption risks are too high.

According to a new survey from consulting firm Alix Partners, corruption risks for companies in the United States, Europe, and Asia are expanding. Anti-corruption laws and regulations are proliferating, increasing the need for compliance efforts. They are also causing some companies to avoid or delay acquisitions due to bribery risks, and they are avoiding or pulling out of some regions or countries due to those risks. Nine out of ten respondents said their industries are exposed to corruption risk, compared to 85 percent in 2015, and 28 percent cite "significant risk," compared to 22 percent last year.

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The number of companies reporting non-GAAP measures is on the rise, as is the hyperventilating over their use

By Joseph McCafferty

May 11, 2016

There is a growing backlash against the use of measures that don't meet Generally Accepted Accounting Principles (GAAP) when reporting earnings results, and its quickly becoming a frenzy.

Late last month, the New York Times proclaimed, "Fantasy Math Is Helping Companies Spin Losses into Profits." A headline on Yahoo in March warned, "Companies haven't fudged their numbers this much since the financial crisis." Even Warren Buffett got into the act—although in his famously level-headed way—suggesting in his annual letter to shareholders: "It has become common for managers to tell their owners to ignore certain expense items that are all too real."

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After several months of debate, plans are set to take effect next year

By Joseph McCafferty

May 10, 2016

The Securities and Exchange Commission has approved a plan by the Public Company Accounting Oversight Board to require audit firms to disclose the names of audit engagement partners and to provide more information about other firms that participate in audits.

The PCAOB hopes the new rules will improve the transparency of audits by identifying the lead person in charge of conducting them and shed more light on additional firms that participate, particularly those who contribute audit work on overseas operations.

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Common attributes that advance some IT audit departments from good to great.

By Fred Roth

May 5, 2016

As the use of information technology continues to proliferate so do the associated risks organizations face.

The massive cyber heist affecting more than 100 financial institutions in some 32 countries is only the latest in a spate of data security breaches worldwide. Losses from the attack, disclosed last year, eventually could exceed $1 billion. During the past 10 years, hackers have infiltrated millions of files of customers at eBay, Target, Sony, Heartland Payment Systems, and so many others.

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A new survey finds communication and critical thinking skills in demand among auditors

By Joseph McCafferty

May 4, 2016

A new survey is out about the skills that audit leaders are looking to add to their departments and you may be surprised at what tops the list. Cybersecurity chops? Nope, that ranked twelfth. Financial acumen? Tenth.

The top skills that chief audit executives say they are looking for are critical thinking and communications. Those are the only skills that more than half of respondents cited in the top five traits they are seeking. Nearly two-thirds (64 percent) of the CAE's polled ranked analytical and critical thinking skills among the top five things they look for when recruiting new internal auditors, while just over half (51 percent) said they want candidates with communication skills.

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The SEC is advancing efforts to reform financial disclosure, but real reform is unlikely

By Joseph McCafferty

April 26, 2016

Earlier this month the Securities and Exchange Commission took the next step in its year’s-long campaign to reform the vast dump of information we collectively call financial disclosure. It issued a concept release seeking public comment on hundreds of questions about improving disclosures required under regulation S-K, which covers the majority of financial reporting including annual and quarterly reports.

The SEC has embarked on an ambitious plan to make company filings more useful to investors and to try to eliminate some of the redundancy and legal language that makes such reports nearly impossible to trudge through for all but the most motivated professional investors.

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Part two of our series, Building the Modern Corporate Risk Assurance Function

By Matt Kelly

April 20, 2016

Office politics and turf wars are a fact of corporate life.

They are also among the most dangerous forces an organization can face, because they pit employees against each other and lead individuals to put their own or their departments' interests ahead of the business as a whole. The risk management and risk oversight functions are no strangers to battles for territory and control. Unclear lines of responsibility, siloed thinking, and guarding of information are common among departments and business units responsible for managing risk. For that reason, they are also the perfect starting point to explore how compliance, audit, and other corporate governance functions should work together to achieve better risk assurance.

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Filings involving company announcements of internal control weaknesses hit highest level in 10 years

By Joseph McCafferty

April 19, 2016

While Valeant Pharmaceuticals continues to battle allegations of bookkeeping misdeeds, it's not the only company dealing with accounting problems. The number of class-action securities law suits based on allegations of accounting missteps increased for the third straight year in 2015, according to a new report from Cornerstone Research. There were 71 such class-actions in 2015, up from 69 in 2014.

Accounting-based class-actions continued to costs companies a bundle, too. Accounting case settlement dollars reached $2.6 billion in 2015. Not only did the number of accounting case filings increase in 2015, the market capitalization losses associated with those filings jumped as well," said Elaine Harwood, a vice president of Cornerstone Research and head of the firm's accounting practice.

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A bank anti-fraud Executive's open memo to the Justice Department is a too-rare example of plain talk on regulation

By Joseph McCafferty

April 13, 2016

During the past several years that I have covered corporate compliance, auditing, accounting, and other functions that intersect with government regulation the executives and company representatives I've talked to have always choose their words very carefully. That is, when they choose to talk at all.

I understand the discretion. You can't be too cautious when you're speaking to a journalist about how you may or may not be dealing with all the many issues that can get you in trouble with the government. I generally don't expect too much candor when companies are talking about how they handled an internal fraud, an instance of potential corruption, or whether or not they are doing all they can to combat inhumane practices by suppliers around the globe. Those are not going to be free-wheeling conversations.

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Audit regulator wants lead auditor to provide better oversight on farmed out audit work

By Joseph McCafferty

April 12, 2016

The Public Company Accounting Oversight Board has proposed changes to audit standards that would require lead auditors to provide better oversight and take more responsibility for audit work that they farm out to other audit firms. It also wants to impose a more uniform approach to the lead auditor's supervision of other auditors and has proposed a new auditing standard for situations in which the lead auditor divides responsibility for the audit with another firm.

When auditing a multinational company, lead auditors often seeks the help of other firms or individual accountants to complete the audit. According to the PCAOB, other auditors are used in about 55 percent of audits performed by large U.S. audit firms.

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Information security expert Jeffrey Ritter says the current risk-management model is irreparably broken

By Joseph McCafferty

April 6, 2016

Most information security experts aren't afraid to state bluntly: "We're losing the battle for information security." But then again, we already knew that. Near-daily headlines about the latest cyber-theft or data breach have made that pretty clear to most people.

"It's broken and it's not getting better," said Jeffrey Ritter, author and University of Oxford lecturer. During a keynote presentation this week at InfoSec World, an information security conference, Ritter explained that the current model of information security, based on risk management, isn't working. "Risk Management is dead as a business discipline, we just don't know it yet," he said.

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ISACA issues guide to conducting IT audits

A new report from global IT association ISACA identifies five steps organizations should take to create an effective audit program and reap the benefits of a successful information systems audit.

IT audits help enterprises ensure the secure and reliable operation of the systems that are critical to organizational success. The effectiveness of the audit depends largely on the quality of the audit program, according to a new ISACA report, titled Information Systems Auditing Tools and Techniques: Creating Audit Programs.

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How to work with your board to define risk and compliance objectives

By Matt Kelly

March 30, 2016

Risk assurance today is nothing like what it used to be.

Gone are the early days of risk assurance, where the external audit firm inspected financial statements and corporate compliance officers (assuming your firm had one) worked strictly on regulatory filings. The board simply reviewed the accuracy of audit and regulatory filings, and then talked strategy with the CEO.

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Audit committees aren't always getting the data and information they are looking for

Podcast

 

March 30, 2016

In this podcast, Joseph McCafferty, head of audit content at the MIS Training Institute, talks with Blythe McGarvie, an author, speaker and director on several corporate boards. She is also chair of the audit committee at Viacom.

According to McGarvie, there is some truth to reports that show a gap between the information internal audit departments are providing and what audit committees are looking for. She says that while most internal audit executives provide accurate and useful information, it can always be better. She says the audit committee is looking for more information on the potential underlying problems that can cause specific incidents.

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New report finds effective communication, supervision are keys to make third-party audits work

March 28, 2016

Companies are increasingly turning to outside service providers to help out with their internal audit activities, especially when it comes to specialized work, according to a recent report.

An annual survey of global internal audit professionals finds that, on average, one in three corporate internal audit departments worldwide outsource some of that work to third-party services. And North American companies have the highest rate of using third parties for internal audits, with 56 percent of responding firms relying on outside services.

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PCAOB Outlines Ambitious Agenda After Budget Hike

By Joseph McCafferty

March 22, 2016

Last week the Securities and Exchange Commission approved a $258 million budget for the Public Company Accounting Oversight Board. The PCAOB acts as a check on accounting firms that conduct audits of public companies.

That’s right, we spend a whopping quarter of a billion dollars to check the checkers who check the accounting of public companies. That is, of course, after their own internal audit departments check it first.

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Thought bribery and corruption risks were subsiding? Think again.

By Joseph McCafferty

March 17, 2016

Bad news for internal auditors, compliance executives, and risk managers who were hoping that bribery and corruption risks would start to subside after being on high alert for the last few years: they are actually increasing.

According to a new survey conducted by Kroll, a risk-management consulting firm, and Ethisphere, which promotes ethical business practices, 40 percent of all compliance officers surveyed believe their company's bribery and corruption risks will increase in 2016. These senior-level ethics and compliance professionals cited two primary factors as contributing to increased corruption risks: global expansion and an ever-increasing number of third-party business relationships.

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