Regulatory Oversight of Financial Reporting: Securities and Exchange Commission Comment Letters

2017 ◽  
Vol 34 (2) ◽  
pp. 1128-1155 ◽  
Author(s):  
Rick Johnston ◽  
Reining Petacchi
Keyword(s):  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Regulatory Oversight ◽  
Comment Letters

Comment letters on annual reports: Evidence from an emerging market

2021 ◽  
Author(s):  
Shuo Yang
Keyword(s):  
Propensity Score ◽  
Financial Reporting ◽  
Emerging Market ◽  
Securities And Exchange Commission ◽  
Annual Reports ◽  
Matched Sample ◽  
Disclosure Quality ◽  
Weak Institutions ◽  
Comment Letters ◽  
The U.S

This paper examines comment letters on firms’ annual reports in an emerging market. The literature primarily focuses on comment letters issued by the U.S. Securities and Exchange Commission (SEC), although many other market regulators also use SEC-style comment letters. Comment letters can potentially be very impactful in emerging markets due to weak institutions and low disclosure quality in these markets. Using comment letters in China from 2015 to 2019, I find that the market response to the receipt of comment letters is significantly negative and associated with the severity of the comment letters. The receipt (severity) of comment letters is associated with adverse regulatory consequences, CEO turnover, corrective actions to remedy financial reporting, and poor future financial performance in the propensity score matched sample (recipient sample). Overall disclosure quality in the post-review year does not increase, but some comment letter topics prompt topic-specific financial reporting changes.

SEC enforcement targets: a Christian virtue ethics perspective

2020 ◽  
Vol 27 (4) ◽  
pp. 1047-1059
Author(s):  
Christopher J. Demaline
Keyword(s):  
Virtue Ethics ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Securities And Exchange Commission ◽  
Future Research ◽  
Financial Fraud ◽  
Regulatory Oversight ◽  
Content Type ◽  
Target Firms ◽  
Financial Misconduct

Purpose The purpose of this paper is to provide a summary and synthesis of US Securities and Exchange Commission accounting and auditing enforcement release (AAER)-based research on financial misreporting firms and the firms’ management. Christian virtue ethics (CVE) is used as a framework for this review. Suggestions for future research are presented. Design/methodology/approach This is a review of the academic literature covering AAERs. The findings are viewed through the lens of CVE. Findings Several financial misconduct studies use samples developed from AAER targets. These studies commonly focus on specific characteristics of AAER targets. This paper presents and analyzes characteristics of AAER targets and considers how CVE may mitigate fraudulent reporting. Research limitations/implications The main limitation of the research is that the literature review is confined to studies of financial fraud that use an AAER-based sample. Nevertheless, the sample is sufficient to provide insight into the common characteristics of AAER target firms and related entities. The benefits of CVE are considered. This study has relevant implications for investors, regulators and researchers concerned with financial reporting quality, fraud, regulatory oversight and business ethics. Originality/value This paper provides a set of AAER target features and considers how CVE may mitigate financial fraud. Financial regulators, accounting standards setters and researchers may be interested in the findings presented in this study.

An analysis of SEC comment letters and IFRS

2017 ◽  
Vol 15 (2) ◽  
pp. 226-244 ◽  
Author(s):  
Cheryl L. Linthicum ◽  
Andrew J. McLelland ◽  
Michael A. Schuldt
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Securities And Exchange Commission ◽  
Annual Reports ◽  
Financial Accounting Standards Board ◽  
Content Type ◽  
Generally Accepted Accounting Principles ◽  
Financial Reporting Standards ◽  
The Usa ◽  
Comment Letters

Purpose This study investigates the influence of the Securities and Exchange Commission (SEC) on the interpretation and application of International Financial Reporting Standards (IFRS) by examining a group of SEC-selected foreign private issuers filing 2005 annual reports in the USA and reporting using IFRS for the first time. Design/methodology/approach This paper uses hand-collected information from SEC comment letters to analyze IFRS topics and documents the ultimate resolution of each SEC comment (no change to filing, current change to filing or prospective change to future filing). The authors use descriptive statistical analyses, as well as a logistic regression model involving the resolution of each SEC comment, to examine the SEC’s influence on the interpretation of IFRS. Findings The study finds both higher comment totals, and higher numbers of required filing modifications, for those IFRS pronouncements which were identified as needing improvement during the 2006-2008 convergence efforts by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Additionally, the study documents a decreasing likelihood of a filing modification when US generally accepted accounting principles (US GAAP) guidance is referenced in comment letter correspondence involving IFRS topics. Originality/value The study extends the IFRS literature and the SEC comment letter literature by focusing on the resolution of comments directed at IFRS disclosures, as well as exploring the factors which influence whether a comment ultimately requires a filing modification.

Fraud Risk Awareness and the Likelihood of Audit Enforcement Action

2016 ◽  
Vol 30 (3) ◽  
pp. 379-392 ◽  
Author(s):  
Jared Eutsler ◽  
Erin Burrell Nickell ◽  
Sean W. G. Robb
Keyword(s):  
Financial Reporting ◽  
Financial Distress ◽  
Professional Community ◽  
Securities And Exchange Commission ◽  
Counterfactual Reasoning ◽  
Going Concern ◽  
Enforcement Action ◽  
Fraud Risk ◽  
Regulatory Perspective ◽  
Going Concern Opinion

SYNOPSIS Prior research indicates that issuing a going concern opinion to financially stressed clients generally reduces the risk of litigation against the auditor following a bankruptcy (Kaplan and Williams 2013; Carcello and Palmrose 1994). However, we propose that a going concern report may indicate prior knowledge of financial distress, an important fraud risk factor, and this may have repercussions for the auditor if a fraud is subsequently uncovered. Consistent with counterfactual reasoning theory, experimental research suggests that a documented awareness of fraud risk actually increases the likelihood of litigation against the auditor following a fraud (Reffett 2010). This concern has been echoed by the professional community (AICPA 2004; Golden, Skalak, and Clayton 2006) and may be exacerbated by the current outcome-based regulatory environment (Peecher, Solomon, and Trotman 2013). To examine this issue we review Auditing and Accounting Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for alleged financial reporting frauds between 1995 and 2012. Results suggest that going concern report modifications accompanying the last set of fraudulently stated financials are associated with a greater likelihood of enforcement action against the auditor. This finding is consistent with counterfactual reasoning theory and suggests that, from a regulatory perspective, auditors may be penalized for documenting their awareness of fraud risk when financial statements are later determined to be fraudulent.

Viewing the 1996 FAF Restructuring as Policy Making without a Formal Due Process

2002 ◽  
Vol 16 (3) ◽  
pp. 199-214 ◽  
Author(s):  
Paul B. W. Miller
Keyword(s):  
Financial Reporting ◽  
Policy Making ◽  
Due Process ◽  
Accounting Standards ◽  
Sole Source ◽  
Securities And Exchange Commission ◽  
Financial Accounting ◽  
Perceived Threat ◽  
Financial Accounting Standards Board ◽  
Public Accounting

In 1996, a major financial reporting controversy emerged, escalated, and was resolved without substantial exposure or a formal due process. Specifically, a committee of the Financial Executives Institute (FEI) sent a letter to the chair of the Financial Accounting Foundation (FAF) asserting that the Financial Accounting Standards Board (FASB) “process is broken and in need of substantive repair.” When Securities and Exchange Commission (SEC) Chair Arthur Levitt determined that neither FAF nor public accounting leaders were dealing with the FEI proposals to his satisfaction, he acted to defeat this perceived threat to FASB's independence, focusing on the composition of the FAF. In response, the FAF trustees resisted because they viewed his intervention as a threat to FASB's independence. When the trustees did not voluntarily change, Levitt proposed reconsidering Accounting Series Release No. 150, which designates FASB as the sole source of GAAP for SEC filings. Eventually, Levitt prevailed. This paper describes this intervention as a case of policy making without a formal due process and adds to the already weighty evidence that accounting standards are political.

Growing Pains at Groupon

2013 ◽  
Vol 29 (1) ◽  
pp. 229-245 ◽  
Author(s):  
Saurav K. Dutta ◽  
Dennis H. Caplan ◽  
David J. Marcinko
Keyword(s):  
Financial Reporting ◽  
Intrinsic Value ◽  
Securities And Exchange Commission ◽  
Internal Controls ◽  
Revenue Recognition ◽  
Material Weakness ◽  
Going Public ◽  
Right Of Return ◽  
Growing Pains ◽  
Financial Metrics

ABSTRACT On November 4, 2011, Groupon Inc. went public with an initial market capitalization of $13 billion. The business was formed a couple of years earlier as an offshoot of “The Point.” The business grew rapidly and increased its reported revenue from $14.5 million in 2009 to $1.6 billion in 2011. Soon after going public, prior to its announcement of its first-quarter results, the company's auditors required Groupon to disclose a material weakness in its internal controls over financial reporting that impacted its disclosures on revenue and its estimation of returns. This case uses Groupon to motivate discussion of financial reporting issues in e-commerce businesses. Specifically, the case focuses on (1) revenue recognition practices for “agency” type e-commerce businesses, (2) accounting for sales with a right of return for new products, and (3) use of alternative financial metrics to better convey the intrinsic value of a business. The case requires students to critically read, analyze, and apply authoritative accounting guidance, and to read and analyze communications between the Securities and Exchange Commission (SEC) and the registrant.

Do Small Firms Benefit from Auditor Attestation of Internal Control Effectiveness?

2012 ◽  
Vol 31 (4) ◽  
pp. 115-137 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Wei Yu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Small Firms ◽  
Securities And Exchange Commission ◽  
Control Effectiveness

SUMMARY While auditor attestation of the effectiveness of internal control over financial reporting (ICFR) is required for firms with a public float of at least $75 million (accelerated filers), the Securities and Exchange Commission (SEC) has delayed auditor attestation for non-accelerated filers several times. The Dodd-Frank Act of 2010 exempts non-accelerated filers from auditor attestation. We examine the relation between auditor attestation and revenue quality for a sample of non-accelerated filers and small accelerated filers. We find that discretionary (abnormal) revenues, our proxy for revenue quality, are lower by about 1.5 percent of total assets for accelerated filers relative to non-accelerated filers. This finding holds even among firms whose management has certified their ICFR to be effective. Overall, the findings support the notion that auditor attestation of the effectiveness of ICFR benefits small accelerated filers via higher revenue quality. We believe our findings are timely and potentially informative to regulators, investors, and others.

Accounting Standards and Earnings Quality — Evidence from Registered ADRs

2018 ◽  
Vol 21 (04) ◽  
pp. 1850022
Author(s):  
Yaseen S. Alhaj-Yaseen ◽  
Kean Wu ◽  
Leslie B. Fletcher
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Securities And Exchange Commission ◽  
High Quality ◽  
Reporting Standard ◽  
International Financial Reporting Standard ◽  
The Us ◽  
Us Gaap

This paper examines the changes in earnings quality of registered American Depositary Receipts (ADRs) as a result of switching accounting standards. We aim to shed light on the potential impact of International Financial Reporting Standard (IFRS) adoption on US firms. A suboptimal approach to achieve this goal is through examination of US firms’ surrogates such as ADRs. Unlike previous studies, we made a distinction between registered and unregistered ADRs and affirmed that registered ADRs are the closest surrogates with which to conduct our analysis because they are exclusively required to adhere to the Securities and Exchange Commission (SEC)’s stringent disclosure requirements. When cross-listing their equity on the US exchanges, foreign issuers can file their financial reports with the SEC using IFRS, US GAAP (generally accepted accounting principles), or their domestic GAAP with reconciliation to US GAAP. An improvement in earnings quality is documented when ADRs adopt US GAAP or IFRS versus domestic GAAP. However, when the comparison is made between US GAAP and IFRS, no difference in earnings quality is documented. These results indicate that switching to high-quality accounting standards is likely to improve earnings quality. This improvement is maximized when the difference between reporting standards is high and minimized if otherwise. Our conclusion is that the adoption of IFRS in the US is unlikely to change earnings quality of local issuers. Moreover, we drew a distinction between reconciliation with and adoption of high-quality accountings standards and find that while the former can enhance earnings quality, the latter can further improve it.

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