SEC Enforcement: Eyes on Financial Reporting

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By Xing Gao

Dec. 8 — Financial reporting issues were a very important focus for the SEC in 2016 and will continue to be a priority in 2017, Securities and Exchange Commission Enforcement Director Andrew Ceresney told an accounting conference.

The division has brought significant cases in the financial reporting area, enforcement division chief accountant Michael Maloney said Dec. 6 at the American Institute of CPAs’ annual conference on SEC and PCAOB developments.

“We have seen increased in numbers of accountants suspended under Rule 102 (e), professional conduct,” Maloney said. “The data points reinforce that the division’s emphasis on financial reporting program is having a real impact on protecting investors.”

Revenue Recognition

“The first area that we brought cases on—probably not surprisingly—is improper revenue recognition,” Maloney said. Unsupported revenues, acceleration of revenues, and false sales and shipping are among the areas the division has cases against, largely because revenues are such a critical measure of performance, he said.

Lime Energy, for example, has recorded revenues on jobs that do not exist, Maloney said. The company recognized revenue earlier than allowed in order to meet internal targets. Marrone Bio has created false sales and shipping documents and intentionally ship the wrong product to book sales, he said. Revenue recognition issues will remain to be the division’s focus in the coming years, he said.


The Enforcement Division is looking beyond debts and credits and is also putting efforts into disclosures, Ceresney and Maloney said.

“We are also spending a lot of time looking at disclosures, our cases are focusing not only on disclosures on the financial statements, but also on Management Discussion & Analysis, press releases, and earnings calls,” Maloney said.

Disclosures are subjective and allow for professional judgment. “But just because the subjectivity will not be an automatic or absolute defense on those type of issues,” the division is focusing on the disclosures required under relevant rules, Maloney said.

It will evaluate all the evidence to support whether disclosures remain in accordance with the rules, Maloney said. Management, audit committees and auditors should all help ensure that investors receive the disclosures that are required under the rules.

Internal Control

Maloney told the conference that the commission’s cases on internal control reinforce the importance of strong internal control being the foundation of reliable financial reporting.

The Magnum Hunter case of failed internal controls involved the staffing of the actual financial accounting function. The division brought charges against that company’s CFO, chief audit officer, the audit partner, and an outside Sarbanes-Oxley Act consulting firm for deficient evaluation of the company’s internal control over financial reporting (ICFR).

ICFR refers to a company’s process for providing reasonable assurance to the public regarding the reliability of its financial reporting. SEC rules require company management to evaluate and annually issue reports on the effectiveness of their ICFR.


Auditing is another area of the division’s focus. Maloney said that the commission also continues to closely coordinate with the Public Company Accounting Oversight Board on enforcement programs that help efficiency and effectiveness of both agencies.

One purpose of SEC rules is to protect the commission’s processes in situations when auditors may not fulfill their responsibilities and fail to adhere to professional auditing standards. Lack of professional skepticism, over reliance on management’s representation, lack of sufficient evidence, lack of due professional care, and poor or non-existing audit documentation are the major issues in audit enforcement .

Auditors also must remain independent, both in appearance and in fact, Ceresney said. “Firms must have robust monitoring and training on independence issues so that they can comply with the independence requirements and the auditors can be aware of potential issues,” he said.

Other areas enforcement division focus include:

  •  expense recognition;
  •  valuation and impairment decisions;
  •  accrued liability; and
  •  managing earnings and other financial targets.

Staying Out of Trouble

How to stay out of the trouble with the division? Maloney said that preparers have to comply with not only the generally accepted accounting principles, but also with other accounting standards. They also must understand other federal securities laws that may impact filings.

On the audit side, adhering with professional auditing standards, performing due professional care and professional skepticism, and staying aware of potential audit independence issues help avert enforcement troubles.

To contact the reporter on this story: Xing Gao in Washington at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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