After major scandals like Enron, WorldCom and Tyco, one would think that companies and their directors would understand that there are targets on all their backs now. The SEC is coming for them, and eventually they all get caught.
The SEC releases Accounting and Enforcement Reports (AAERs) throughout the year discussing recent cases and findings relating to violations made by those who deal with the SEC. The majority of these reports discuss improper professional conduct by auditors, but some involve companies and their high-ranking officers.
When companies were involved, the majority of violations dealt with similar issues: improper and fraudulent revenue recognition, improper asset valuation, earnings, disclosure violations and insufficient internal controls.
Now unfortunately, there is not much that outsiders can do to stop executives from willfully manipulating accounting books. Most likely these companies all either had in-house counsel or a major firm on retainer, but to no avail, these violations were still carried out. However, the one that can be corrected is the insufficient internal controls. Which is good because the SEC has emphasized the importance of maintaining proper internal controls over financial reporting (ICFR).
It is likely that when companies first start their ICFR is in good working order and in compliance with the standards and practices at the moment. These standards and practices evolve however, and it is vital that companies keep up with the evolution. Further, a company may expand and develop much more rapidly than first anticipated, which is a good problem to have, but is not an acceptable excuse for falling behind on maintaining proper internal controls.
Successful companies spend at least some portion of their year reviewing the past years progression, or in some cases regression, take a snapshot of where they are and forecast where they want to go. For most this is done for the purposes of the annual stockholders meeting. And if these companies want to maintain that upward trajectory, and stay out of the crosshairs of the SEC, it is vital that they also set aside some time to review, revamp and implement an ICFR that is correct and up to date with the SEC’s rules and regulations.
A failure to comply and the SEC will not only be looking into the company for possible charges and penalties, but also at the executives and directors. In the eyes of the SEC, anyone involved in the scheme is fair game, and sooner or later everyone gets caught.
Just some additional information you may find interesting, a helpful graphic that shows the 10 worst corporate accounting scandals.