According to Tatyana Shumsky at the Wall Street Journal, the Securities and Exchange Commission has increased efforts to regulate the use of accounting metrics that do not conform to the U.S. Generally Accepted Accounting Principles, known as non-GAAP.  The SEC’s endeavor began through its division of corporation finance, which issued new compliance guidelines and sent more non-compliance letters to companies than it had in the past.  More recently, the SEC’s enforcement division is getting involved and has been probing companies on their non-GAAP financial reporting practices, as reported by the WSJ.  Indeed, according to Michael Maloney, chief accountant of the SEC’s enforcement division is looking into violations of rules governing non-GAAP metrics.  “It is a focus in within the division, we are looking closely at it,” Mr. Maloney told the American Institute of CPAs conference in Washington on Tuesday, as reported by Shumsky.

money and calculatorThe takeaway for companies that use non-GAAP metrics in their financial reporting is that the SEC has signaled their intent to increase regulation and enforcement in this area.  Be sure your compliance team has reviewed your non-GAAP financial reporting practices, particularly in light of the SEC’s division of corporate finance’s new compliance guidelines, which can be found here:

The PCAOB adopted two attestation standards relating to auditors’ examinations and reviews of broker-dealer compliance and examination reports and adopted an auditing standard for the audits of supplemental information that broker-dealers file with the SEC.

The preparation by broker-dealers of compliance or exception reports are new requirements that were added by the SEC when it adopted amendments to Securities Exchange Act of 1934 Rule 17a-5 on July 30, 2013.  The PCAOB’s standards are subject to approval by the SEC.  If approved, the effective dates with the Rule 17a-5 effective dates for fiscal years ending on or after June 1, 2014.  The PCAOB has seen significant compliance problems under the existing standards through its interim inspection program.  The PCAOB plans to adopt conforming rules to reflect the changes relating to broker-dealer audits.

Broker-dealer auditors should be prepared for these changes.

The Securities and Exchange Commission announced three new enforcement initiatives, including a task force aimed at rooting out potential fraud involving issuer disclosures and audit failures.  See

The SEC said its Financial Reporting and Audit Task Force will expand the Enforcement Division’s efforts to identify securities law violations relating to the preparation of financial statements; issuer reporting and disclosures; and audit failures.  The SEC also announced a Microcap Fraud Task Force, and a new Center for Risk and Quantitative Analytics.  The SEC claims that financial fraud is frequently detected through issuer restatements.  These restatements have declined in recent years through the quality controls instituted by the Sarbanes-Oxley Act of 2002.

The financial reporting task force will focus on identifying and exploring areas that may be susceptible to fraudulent financial reporting, reviewing financial statement restatements and revisions, analyzing industry performance trends, and using risk-based analytical tools such as the Accounting Quality Model to identify financial statement issues.  The task force will include enforcement attorneys and accountants from across the country, and collaborate closely with the Division’s Office of the Chief Accountant, the SEC Office of the Chief Accountant, the Division of Corporation Finance, and the Division of Economic and Risk Analysis.

The microcap task force will focus on fraud in the issuance, marketing, and trading of microcap securities.  The task force will develop and implement strategies to detect and fight microcap fraud, especially by focusing on “gatekeepers,” such as attorneys, auditors, and broker-dealers, and other significant participants.  The Center for Risk and Quantitative Analytics will support and coordinate the division’s risk identification and assessment, and data analytic activities.  A key objective of the Center for Risk and Quantitative Analytics will be to assist Staff members, bringing them analytical techniques and computing capacity with special expertise in data mining while assisting in targeting investigations.

These changes indicate the SEC’s efforts to “stay ahead of the curve.”

The PCAOB issued a policy statement regarding its enforcement investigations, in that it will consider extraordinary cooperation, including voluntary and timely self-reporting, remedial or corrective action, and providing substantial assistance during the investigative process.  This type of cooperation may result in reduced charges and/or sanctions.  The settlement documents may also indicate the cooperation, or there may be no disciplinary action at all.

The PCAOB believes this policy will encourage firms and associated persons to self-report, correct and remediate.  Although the PCAOB, generally, requires cooperation, the form of cooperation must be greater, and may include discovery of potential violations earlier and conclude investigations sooner.  However, the PCAOB is the final arbiter of the meaning of cooperation, and it will also consider the conduct of supervisors, management, and associated persons.  In particular, it will look at supervision and training before acknowledging cooperation.

In sum, the PCAOB is following other agencies on the subject of cooperation.

Auditors engaging in non-audit consulting?  A major accounting firm pushing for more consulting work?  Recently, the SEC’s chief accountant indicated that there were concerns at the SEC regarding auditor independence as a result of this push for non-auditing work from accounting firms.

In particular, the concern related to auditing firms boosting their non-audit consulting business.  This is particularly troubling given this was a issue was one of the impetuses giving rise to the  enactment of the Sarbanes-Oxley Act.  This SEC concern relates to there being developed a conflict of interest.  Such a conflict may result in a diminution of auditor independence. 

Although the SEC has spoken on this topic, no action has yet been announced.  We would not be surprised if we did not SEC attempt to “nail some hides to the shed.”

In early December, the PCAOB issued a release indicating that accounting and auditing professionals need to be skeptical regarding their work.

The PCAOB is suggesting that professionals in the accounting and auditing profession must be critical of their oversight responsibilities with their clientele.  Regulators expect them to continue to exercise that skepticism in their judgments as they work through audits and other accounting functions.  If such skepticism is missing, the PCAOB seems to infer that there could be consequences.

Accordingly, PCAOB is watching for this skepticism, auditors and accountants exercise it.

Although it has been somewhat circumspect, the SEC seems to be stalling on a move towards adopting the international accounting standards of International Financial Reporting Standards (“IFRS”).  Such an approach has left the Europeans in a tizzy!!

The United States has an interesting history with international accounting standards.  The SEC and the American accounting industry has in many respects attempted to avoid such a move.   There has notably been a good deal of frustration from outside of the United States as to the refusal by the SEC to issue a decision on the incorporation of IFRS.

Thus, the international community is looking for a more positive step from the SEC on these standards.  Maybe, the new year will bring such a decision.

Accountants beware – prison lurks.

Recently, a certified public accountant and auditor was sentenced to 54 months in prison for his role in a nearly half-billion dollar investment scam that impacted over 3,500 investors.  In the sentencing, the court indicated accountants and auditors are gatekeepers of our financial system, and must protect that system and those who are relying upon it for their well-being.  The court then went on to imposing a sentence of nearly 5 years in prison.

Accountants and CPAs need to be aware of these issues, and must be assertive with their clients to ensure their own security and the well-being of the investing public.

The SEC is extremely concerned about foreign auditors.

In particular, the SEC is worried that those who work in certain European countries and in China are not subject to auditor requirements or the PCAOB.  Essentially, the SEC is concerned over the lack of US oversight over these foreign auditors.  Further, the SEC is concerned about if their audit reports provide accurate information for investors.

Although the SEC has not indicated enforcement action, it is considering if it should instruct the  PCAOB to engage in further regulation of these entities and their issuers.  See http://WWW.SEC.GOV/NEWS/SPEECH/120312LAA.HTM

We have repeatedly stated that auditors are significant players in today’s securities industry.  No other than the SEC has made this point on numerous occasions.  Recently, the SEC brought this fact home with the filing of administrative proceedings against two auditors.  See

The SEC claimed these individuals failed to follow professional standards in reviewing valuations derived from management.  These auditors failed to properly review suspect real estate loans.  The SEC said these auditors, basically, “rubber-stamped” the material it received from management.  As such, the SEC charged these auditors with several violations of PCAOB standards.

There is no doubt that auditors must improve their reviews regarding valuations or face the SEC’s wrath.