COSO’s ERM Framework Has Fresh Paint, New Open Concept
I remember in college, I’d turn in a paper and feel a sense of relief knowing that I never had to look at it again. Feedback from the instructor was informative but required no further action. Man, do I miss that. Don’t you? I’m sure PwC, who authored the COSO Enterprise Risk Management (ERM) Framework, […]
Some Companies Unsure About This New COSO Internal Control Framework
Some dates are not set in stone, like the day of the week I decide to clean the cat fountain or change my sheets. Others, like the day I need to pay my rent and the fiscal year-end on or after December 15, 2014 are not so variable. When it comes to COSO's new 2013 […]
Wanted: New COSO Chairman
Are you looking for a side project? Do you love internal controls? Could you use some extra beer money? Then chairing the Committee of Sponsoring Organizations of the Treadway Commission may be for you! The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is seeking a new chair for a three-year term that would begin […]
COSO Willing to Accommodate Anyone Who Hasn’t Been Able to Get the Hang of Things the Past Two Decades
Auditors and companies looking to adhere to a proposed internal control framework for financial reporting were told yesterday at a Baruch College auditing conference not to sweat the actual implementation date when the draft framework is finalized in March 2013. Comparing the new framework from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to […]
COSO’s Internal Control Framework Update Has Some Material Weaknesses
Oh my God. Last month, COSO released a post-public exposure version of its update of Internal Control – Integrated Framework. In February, George Lucas released Phantom Menace in 3D. Both of these caused nerds to cream their jeans. For Star Wars nerds who work in internal control, 2012 has been better than sex (a comparison […]
CPA Exam Pass Rates Are Up… WAY Up
Alright, so what did you all do to turn this ship around? This is a huge departure from the embarrassing early 2011 performance we saw around this time last year, what gives? Comparing this with last year, it's clear there's some good CPA exam mojo in the water these days: On a cummulative basis, candidates […]
You Can Officially Check “Updated COSO Internal Control – Integrated Framework” Off Your Wish List
Another Festivus miracle! The Committee of Sponsoring Organizations of the Treadway Commission (COSO) – an organization providing thought leadership and guidance on internal control, enterprise risk management, and fraud deterrence – has released, for public comment, an updated Internal Control – Integrated Framework (Framework) intended to help organizations improve performance with greater agility, confidence and […]
COSO Study Finds Accounting Frauds Getting Larger, Execs Named in Nearly 90% of Cases
If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?
If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or less way: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.
If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.
The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:
• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.
• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.
• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.
• Revenue frauds accounted for over 60 percent of the cases.
• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.
• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.
• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.
Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.
Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.
While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.
COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,
[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”
And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.
One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.
COSO Press Release [COSO]
Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies [COSO]
COSO Fraud Study Catalogs Latest Decade of Incidents [Compliance Week]