Washington, DC – Improved accounting policies and internal controls are key for stemming fraud and reducing the number of financial restatements, according to a new report from the Anti-Fraud Collaboration. The report, Addressing Challenges for Highly Subjective and Complex Accounting Areas, compiles leading-practice recommendations from dozens of company executives, corporate directors, auditors, and regulators who attended two 2016 workshops to discuss ways to help deter fraud and enhance financial reporting.
“Companies are sharing leading practices and voluntarily working with regulators to help deter and detect financial reporting fraud,” said Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), on behalf of the Anti-Fraud Collaboration. “The Anti-Fraud Collaboration is pleased to present these recommendations to help companies improve their accounting policies and system of internal controls. Investors, our capital markets, and public companies all win when we work together to combat fraud.”
The Anti-Fraud Collaboration held workshops in New York and San Francisco that brought together members of the financial reporting supply chain, including regulators, audit committee members, financial executives, internal auditors, and external auditors.
The workshops explored issues that were identified in an analysis of enforcement actions in which the U.S. Securities and Exchange Commission (SEC) took an action against an issuer or individual because of a securities violation and asserted that there were serious issues with the companies’ internal controls. The workshops also examined case studies as a catalyst for the discussions.
The report makes key recommendations concerning company accounting policies:
- Accounting policies must adhere to technical accounting guidance. Supervisors and managers are responsible for implementation. It is critical that these policies be understandable to non-accountants who may not be conversant in the nuances of technical accounting.
- Process must be married to policies. Accounting policies must be reviewed at regular intervals and address how to uncover and monitor changes in activities that impact accounting.
- Policies must be tested in the field prior to implementation, and then monitored for compliance post-implementation.
- Accounting policies in regards to revenue recognition should be granular because even slight changes in contract terms can have a major impact on revenue.
The report also outlines key recommendations regarding internal control over financial reporting (ICFR):
- Tone at the top is an essential component of an ICFR regime.
- A risk-based evaluation is the best approach for achieving effectiveness and efficiency in ICFR.
- Internal controls over unusual and nonroutine transactions are sometimes overlooked or given less attention than core processes when developing an effective ICFR regime.
“Our members are highly committed to the deterrence and detection of fraud and are focused on their responsibility toward that effort, which includes overseeing the preparation of accurate financial information and the importance of designing, monitoring, and maintaining effective internal control over financial reporting,” said Andrej Suskavcevic, CAE, president and CEO, Financial Executives International (FEI). “We fully support the efforts of the SEC to promote cooperation and self-reporting.”
“Successfully battling fraud in financial reporting requires strong collaboration among all the principal players,” said Institute of Internal Auditors (IIA) President and CEO Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA. “This report is built on such collaboration and offers valuable direction and insight on improving accounting policies and internal control over financial reporting.”
"The sharing of leading governance practices is an essential element of effective board leadership," said National Association of Corporate Directors (NACD) President and CEO Peter Gleason. "While this report is an important guide for all corporate directors, it will be especially of interest to our public company audit committee members."
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About the Anti-Fraud Collaboration
The Anti-Fraud Collaboration represents the collaborative efforts of the Center for Audit Quality, Financial Executives International, the National Association of Corporate Directors, and The Institute of Internal Auditors, organizations that actively engage in efforts to mitigate the risks of financial reporting fraud. The Collaboration’s goal is to promote the deterrence and detection of financial reporting fraud through the development of thought leadership, awareness programs, educational opportunities, and other related resources specifically targeted to the roles and responsibilities of participants across the financial reporting supply chain.
About the CAQ
The Center for Audit Quality is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high quality performance by public company auditors, convenes and collaborates with other stakeholders to advance the discussion of critical issues requiring action and intervention, and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs. For more information, visit www.thecaq.org.
Financial Executives International is the leading advocate for the views of corporate financial management. Its more than 10,000 members hold policy-making positions as chief financial officers, treasurers and controllers at companies from every major industry. FEI enhances member professional development through peer networking, career management services, conferences, research and publications. Members participate in the activities of more than 65 chapters in the U.S. and a chapter in Japan. FEI is located in Morristown, NJ, and Washington, D.C. Visit www.financialexecutives.org for more information.
About the IIA
The Institute of Internal Auditors is the internal audit profession’s most widely recognized advocate, educator, and provider of standards, guidance, and certifications. Established in 1941, The IIA today serves more than 185,000 members from more than 170 countries and territories. The IIA’s global headquarters are in Lake Mary, Fla. For more information, visit www.theiia.org.
The National Association of Corporate Directors empowers more than 17,000 directors to lead with confidence in the boardroom. As the recognized authority on leading boardroom practices, NACD helps boards strengthen investor trust and public confidence by ensuring that today’s directors are well-prepared for tomorrow’s challenges. World-class boards join NACD to elevate performance, gain foresight, and instill confidence. Fostering collaboration among directors, investors, and corporate governance stakeholders, NACD has been setting the standard for responsible board leadership for 40 years. To learn more about NACD, visit www.NACDonline.org.