Commentary

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Valeant Accounting Concerns Focus on Revenue Recognition

The latest news about Valeant Pharmaceuticals International Inc., suggesting the need for restatements of recent periods’ financial statements, albeit with limited details reported thus far, again focuses attention on the common matter of the possible abuse of revenue recognition accounting principles.  According the Valeant’s public disclosures to date, the issue appears to pertain to an entity, Philidor Rx Services LLC, a distributor for certain Valeant products organized in 2013, which has been a significant (but under the 10% threshold for “major customer” disclosure) customer for Valeant.  The accounting issue, according to Valeant, is whether sales to Philidor should have been [...]

February 23rd, 2016|

Board Audit Committee Appointments: 2016 Recruitment Tips

With Attention to Talent, Training and Tools, Audit Committee Appointments Might Prove More Attractive It has become commonplace to decry the dearth of talented individuals willing to serve on corporate board audit committees and to speculate on the need to make such appointments more attractive to the right mix of financially literate individuals. For various valid reasons, including litigation risk and the complex and still-expanding body of knowledge that must be mastered to effectively oversee the financial reporting and annual audit functions, many boards are scrambling to find qualified candidates for such assignments. As SEC Chair Mary Jo White recently [...]

December 22nd, 2015|

Criticism of Pfizer Tax Accounting Unwarranted

There has been a great deal of public debate regarding the U.S. corporate tax rate and the impact it has on tax compliance, so-called tax inversions, and economic policy, and inevitably some of this has had strong political coloration. Unfortunately, there appears to still be much confusion, and even misinformation, regarding provisions of tax law, particularly when compounded by lack of understanding of financial reporting rules governing public company annual and quarterly reporting. A recent Wall Street Journal article (“Pfizer Piles Profits Abroad,” by Richard Rubin, 9 November, page B1) may be adding to the confusion by perhaps inadvertently suggesting [...]

November 9th, 2015|

Toshiba Accounting Scandal Shows Tone From the Top Remains a Fraud Risk Factor

Once more a massive accounting fraud is galvanizing critics of corporate governance, both here and abroad, this time engagingly illuminated by the elaborately choreographed resignation of three top Toshiba Corporation executives following disclosure of a $1.2 billion profit overstatement reportedly occurring over a seven year period. Although details are still sketchy, the Financial Times cites an 82-page report prepared by a panel of external lawyers and accountants that details “institutional” accounting malpractices and a corrupt corporate culture. If true, the Toshiba accounting scandal will be one of a long string of financial reporting frauds, including such notorious cases as HealthSouth [...]

July 23rd, 2015|

Annual Report Information Overload: Five Reasons 10-Ks Continue to Expand

In a recent Wall Street Journal article (“The 109,894-Word Annual Report,” June 2, 2015), the fact that corporate annual reports on Form 10-K have expanded by some 40% over just the four-year interval 2010-2013, to an average count of 42,000 words, was bemoaned, with General Electric’s headlined filing cited as perhaps a record-setting example. This is the most recent in a long series of concerns voiced over so-called “information overload,” a topic that has received sporadic academic attention over several decades. Past experience offers scant hope for actually accomplishing either a reduction in the size of filings under the securities [...]

June 15th, 2015|

Dewey & LeBoeuf: Revenue Fraud and Law Firms

Revenue frauds have long been among the most popular forms of financial reporting manipulations. The SEC, for example, has traditionally identified revenue recognition infractions as being either the top or the second most common variety of the management and accounting frauds it has had to pursue.[i] The ACFE, a professional organization of fraud examiners, has documented similar findings in its bi-annual Report to the Nations.[ii] Although other techniques are also able to distort reported earnings, e.g., concealing routine expenses (as was done by WorldCom, for one prominent example) and investment losses (as done by Olympus) by charging them to unrelated [...]

June 5th, 2015|

Do Accountants Face Risk as Fiduciaries?

Courts are increasingly treating accountants as fiduciaries, creating significant risk that they -- and their insurers -- may not realize they face. Outside accountants – including auditors, those providing other attestation and compilation services, tax preparers and even mere advisers – are increasingly facing allegations that they served their clients in a fiduciary capacity. These are not simply idle observations: In general, they are made by clients and third parties seeking to obtain monetary damages from the accountants as a result of, inter alia, errors in financial reporting, tax positions that are subsequently rejected by the IRS or other authorities [...]

May 5th, 2015|

Tax Heavens: Methods and Tactics for Corporate Profit Shifting

Accounting expert Barry Jay Epstein co-authored an article titled, "Tax Heavens: Methods and Tactics for Corporate Profit Shifting," with lead authors Mark Holtzblatt and Eva K. Jermakowicz, published in the January-February 2015 issue of the International Tax Journal. Excerpts from the article appear below. Taxes paid to governments are among the most significant costs incurred by businesses and individuals. Tax planning evaluates various tax strategies in order to determine how to conduct business (and personal transactions) in ways that will reduce or eliminate taxes paid to various governments, with the objective, in the case of multinational corporations, of minimizing the [...]

March 19th, 2015|

An Auditor’s Guide to Uncovering Under-Reported Income in Cash Businesses

Auditing is the process of obtaining and evaluating evidence that supports (or refutes) the material financial statement assertions made by management of the entity under examination.  Auditors must examine sufficient appropriate evidence to support their opinions (per U.S. Auditing Standards, AU-C Section 500, and PCAOB Auditing Standard No. 15), but have always been inclined to focus on documentary evidence, whether internal (books of account, purchase orders, etc.) or external (confirmation responses, etc.) in origin.  This bias is probably a normal consequence of auditors’ education and training and, in the author’s experience, has been exacerbated by the rise in so-called “computer-based [...]

January 20th, 2015|

Revenue Recognition: The Easy Route to Financial Reporting Fraud

Many studies conducted over the years have found that the most common vehicle for financial reporting fraud has been improper revenue recognition – although in a minority of periods this has been exceeded by manipulation of so-called “cookie jar” reserves, which are bogus estimated obligations that can be opportunistically reversed to compensate for earnings shortfalls.  Revenue recognition abuses include both the deliberate mis-timing of recognition of otherwise-valid revenue, and the outright fabrication of revenue that does not deserve recognition at all.  There are several reasons why improper revenue recognition has proven to be the easiest route to perpetration of financial [...]

January 20th, 2015|

Fraudulent Revenue Schemes and How to Detect Them

Of the two major sub-categories of revenue recognition financial reporting fraud – premature recognition of real revenue, and recordation of wholly bogus revenue – the latter should, by all rights, be the easiest to detect, since extraordinary accounting measures have to be taken to perpetuate concealment of what are, after all, nonexistent claims to customer cash.  Furthermore, as with most financial reporting frauds, the perpetrators’ perceived need to “up the ante” from period to period – in order, e.g., to be able to report continuing trends of greater sales volumes and profitability – means that what may have begun as [...]

January 20th, 2015|

Fraud Modeling and Financial Reporting Fraud

Fraud, and in particular financial reporting fraud, costs investors huge sums each year.  The headline cases – Enron, WorldCom, Adelphia, Parmalat – are widely reported and become MBA class case studies, but fraud is far more pervasive than these isolated major events suggest.  The Association of Certified Fraud Examiners (ACFE) publishes its biennial study, Report to the Nations, which regularly reminds us that businesses, on average, lose as much as 6% of revenues to various forms of fraud, of which financial reporting fraud probably accounts for about half, impacting privately held companies as well as “issuers” having public investors. Auditors [...]

December 19th, 2014|

Conflicting Requirements for “Going Concern” Situations Will Impact Financial Reporting by Private and Public Companies

The allocation of responsibilities between company management and outside auditors has long been clear. Management is obligated to develop and implement an accounting system, including pertinent internal controls, to enable the proper and timely recognition, measurement, classification, and recordation of transactions and events bearing upon the entity’s financial position and results of operations, and the periodic preparation of financial statements that present those matters fairly, in accordance with U.S. GAAP or other basis of accounting. Auditors, on the other hand, have been responsible for examining the entity’s financial statements and rendering a professional opinion thereon. Auditors do not create the [...]

September 24th, 2014|