There are many resources available for those seeking to deter and detect financial fraud. Research in recent years has yielded valuable information about the conditions that make an organization more susceptible to fraud, as well as techniques and tools that support both deterrence and detection. This knowledge is of particular value to all participants in the financial reporting process, including management, boards of directors, audit committees, and internal and external auditors.

ANTI-FRAUD COLLABORATION RESOURCES

How does the Securities and Exchange Commission (SEC) go about early identification of potential securities law violations involving financial reporting? In this video, hear from the SEC’s Margaret McGuire, Senior Counsel to the Director of Enforcement and Chief of the SEC’s Financial Reporting and Audit (FRAud) Group. McGuire discusses the objectives of the FRAud group, its extensive use of technology, and how cooperation, self-remediation, and self-reporting are key tenets of the SEC’s enforcement program.

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.”

Addressing Challenges for Highly Subjective and Complex Accounting Areas compiles leading-practice recommendations from dozens of company executives, corporate directors, and auditors who attended two 2016 Anti-Fraud Collaboration workshops to discuss ways to help deter fraud and enhance financial reporting. Taken together, these insights illuminate and underscore how improved accounting policies and internal controls related to highly subjective and complex accounting areas are key for stemming financial reporting fraud and reducing the number of restatements.