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Snapshot | January 2021

Tuesday, January 12, 2021

Hot Off the Presses: New Report Reveals Common Themes in SEC Enforcement of Financial Statement Fraud

A new report released today by the Anti-Fraud Collaboration found common themes among SEC enforcement actions of financial statement fraud, including the types of fraud schemes, industries, perpetrators, and company size.

  • The most common type of fraud incident was improper revenue recognition (43%). Reserves manipulation (24%), inventory misstatement (11%), and loan impairment issues (11%) were other common financial statement fraud schemes.
  • Some industries were charged more frequently than others. Technology services companies (17%) were the most commonly charged industry. Finance (13%), energy (11%), and manufacturing (9%) were also charged in the enforcement actions.

Why it’s important. The report provides insights for deterring and detecting fraud at a time when the COVID-19 pandemic heightens the risk of financial reporting fraud. The CAQ argues that deterring and detecting fraud requires extreme vigilance from all participants in the financial reporting system—regulators, internal and external auditors, audit committees, and especially public company management.

New Fraud Webcast

​​Failure to exercise skepticism can result in significant consequences, including fraud, according to a new webcast hosted by the Anti-Fraud Collaboration (AFC).

  • Why it’s important. COVID-19 has created new challenges for public companies that heighten the risk of fraud. Fraud experts have already reported increases in financial statement fraud during the pandemic, and they expect this trend to continue over the next several months.
  • How to fight fraud. An appropriate level of skepticism can help members of the financial reporting supply chain and other relevant stakeholders enhance their effectiveness in mitigating the risk of fraud and misconduct. Read more from a recent AFC report on skepticism.

CAQ Delivers a Speech on the State of the Auditing Profession 

Public company auditing is currently going through its biggest transformation in decades, as noted by CAQ Executive Director Julie Bell Lindsay during a speech at the AICPA Conference on Current SEC and PCAOB Developments.

Lindsay said three themes are driving the transformation to auditing: COVID-19, the expanding role of the auditor into new areas like ESG reporting, and a new generation of diverse talent entering the workforce.

  • Déjà vu? Lindsay related this moment of transformation to her experience at the Securities and Exchange Commission nearly 20 years ago immediately after the Sarbanes Oxley Act (SOX) had passed.
  • What’s new? Unlike the transformation resulting from SOX 20 years ago, Lindsay said, the current changes are not being forced on the profession as a result of corporate failures. Rather, the profession is responding to—and, in some cases, leading—the market in bringing about change.

Hot Topics for Auditors Heading into Year End

Calendar year-end audits during the pandemic will look very different than in past years, said PwC’s Jorge Milo, National Office Managing Partner and National Quality Office Leader, during a new CAQ webisode.

  • Between the lines. Audits will take longer to complete this year. Auditors will need to phase their work to drive earlier execution and reduce compression at peak times in the audit, exercise enhanced project management, and increase client communication.
  • Our favorite quote. “Dynamic isn’t often a word you hear associated with the accounting profession, but the audit room really was a dynamic place to work for our teams.”

Around the World: Five Countries Have Cumulative Inflation Rates Exceeding 100%, Triggering Accounting Implications

Argentina, Iran, Lebanon, South Sudan, Sudan, Venezuela, Zimbabwe all have three-year cumulative inflation rates exceeding the 100% threshold, according to a new report by the CAQ and its International Practices Task Force.

  • Why it’s important.  There are fundamental accounting implications for companies operating in countries that are considered highly inflationary.
  • Specifically, US GAAP requires that the currency of a foreign entity be changed to the reporting currency of its parent when an economy becomes highly inflationary. In these situations, using the functional currency of the parent ensures the use of a relatively stable unit of measure.

The CAQ report is based on data issued by the International Monetary Fund World Economic Outlook Database, and provides a framework to assist public companies in monitoring inflation statistics in countries where they operate.

ICYMI: Leading the Headlines