The SEC Requires Form 8-K if Any Previously Issued Financial Statements can No Longer be Relied Upon because of Errors or Fraud.
And who was it that gave the City of Beaumont the brilliant advise to never resubmit the 2014 Financial Statements to an Auditor?
Was it Michael Busch from Urban Futures?
Yes, yes it was.
Is Michael Busch from Urban Futures an Accountant or qualified to have any association with Financial Statements?
No. Mike Busch is not an Accountant and should not have been involved with the Financial Statements.
But what about Onyx Jones and Melana Taylor?
Jones and Taylor were hand-picked by Mike Busch specifically because they will commit Fraud.
Corporate reporting quality has been at the forefront of the profession since the major corporate accounting scandals such as Enron and WorldCom at the beginning of the century. Within the last 15 years, the corporate reporting environment has been reshaped by revised corporate reporting standards. This article analyzes various characteristics of financial statement restatements and frauds discovered from 2000 to 2014 to shed some light on how financial restatements and frauds have been affected by shifts in the regulatory and economic environment.
Financial Restatements
Financial restatements are initiated by public companies, independent auditors, or the SEC. Generally, independent auditors discover misstatements in financial statements during audit and inform managers and audit committees of such findings. Auditors, managers, and the audit committees then evaluate the nature and materiality of misstatements and make decisions prior to issuing the financial statements. Managers may waive correcting misstatements that are deemed to be immaterial.
The SEC’s Final Rule: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, effective August 23, 2004, requires that Form 8-K, Item 4.02 be filed by a reporting company to announce restatements if the company or its auditor concludes that “any previously issued financial statements … should no longer be relied upon because of an error in such financial statements.”
Such an announcement should be made within four days after the company or its auditor concludes that any previously issued financial statements should not be relied upon. If the same information is to be disclosed in scheduled quarterly or annual reports issued before the end of the four-day window, however, the reporting company need not announce the restatements.
In practice, there is an increasing trend of filing restatements without first announcing them because the determination of the day previously issued financial statements should no longer be relied upon is subject to the discretion of the companies and their auditors (Marsha B. Keune and Karla M. Johnstone, “Materiality Judgments and the Resolution of Detected Misstatements: The Role of Managers, Auditors, and Audit Committees,” ###em, September 2012, ###a class=”linkExternal” href=”http://bit.ly/2jYUVpS” target=”_blank” rel=”noopener”>http://bit.ly/2jYUVpS).
Following restatement announcements, companies typically file restatements by amending their previously issued financial statements for the periods affected (known as “Big R” restatements).
In the meantime, the audit opinion is also revised to reflect the restatements. In recent years, however, many companies have not announced restatements in Form 8-K and have avoided amending previously issued financial statements for the periods affected. Companies have instead revised the affected numbers for the previous periods and showed them in subsequent quarterly or annual reports (known as “little r” restatements) (Christine E. L. Tan and Susan M. Young, “An Analysis of ‘Littler’ Restatements” ###em, September 2017, ###a class=”linkExternal” href=”http://bit.ly/2jZ37pX” target=”_blank” rel=”noopener”>http://bit.ly/2jZ37pX).
The Role of the SEC
The SEC reviews public companies for violations of securities laws and requires compliance with financial reporting standards. These reviews usually ensue following firms’ press releases, media reports, anonymous tips, or amended filings of firms’ periodic reports. The SEC initiates informal comment letters requesting clarifications after reviewing disclosures and transactions already reported in firms’ periodic reports, and may subsequently issue a formal comment letter if a public company’s response to an informal comment letter is deemed insufficient.
Moreover, the SEC may initiate a formal investigation into a potential restatement or fraud case; such a decision depends upon factors such as availability of resources, potential discoveries of mis-statements, company-specific characteristics, and the potential relevance of the investigation on emerging accounting and financial reporting matters in the capital markets. This discretion to prosecute companies and their executives limits regulatory enforcement. Recent developments suggest a trend towards prosecuting executives responsible for wrongdoing beyond reaching settlements with their companies (Matt Apuzzo and Ben Protess, “Justice Department Sets Sights on Wall Street Executives,” New York Times, Sept. 9, 2015, http://nyti.ms/2jZDkmn).
To facilitate public companies’ compliance with the Sarbanes-Oxley Act of 2002 (SOX) section 404, the SEC released an interpretive guidance for public companies, and the Public Company Accounting Oversight Board (PCAOB) approved Auditing Standard (AS) 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, in 2004.
In an effort to reduce SOX compliance costs, the PCAOB in 2007 superseded AS 2 with AS 5, An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements, to provide public accounting firms with guidelines for auditing accelerated filers’ ICFR under SOX section 404(b).
The 2008 global financial crisis and subsequent recession precipitated the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Section 989G of Dodd-Frank in particular exempts permanently non-accelerated filers (public companies with a total market value of common equity less than $75 million) from compliance with SOX section 404(b).
The Study
The authors set out to analyze how financial reporting quality (i.e., the deterrence and detection of restatements or frauds) has been affected by trends in restatement and fraud from 2000 to 2014. This analysis period includes the passage of SOX, which was enacted to restore public confidence in the U.S. capital markets following major accounting scandals in the early 2000s. In particular, SOX section 404, effective in 2004, mandates management and an external auditor to assess the effectiveness of a public company’s internal control over financial reporting (ICFR), contributing to higher compliance costs.
This survey used the Audit Analytics database (AA; http://www.auditanalytics.com), which scans corporate filings and press releases to identify restatements and frauds. AA defines corporate financial restatements as “errors due to unintentional misapplication of U.S. GAAP” and corporate financial frauds as “intentional manipulation of financial data or misappropriation of assets.” The authors follow AA’s taxonomy of accounting issues to identify the major categories associated with restatements and frauds.
These statistics appear to support the view that the passage of SOX and the implementation of SOX section 404 led to increased restatements.
Fatima Alali, PhD is a professor of accounting at the Mihaylo College of Business and Economics, California State University, Fullerton, Fullerton, Calif.
Sophia I-Ling Wang, PhD is an assistant professor of accounting at the Mihaylo College of Business and Economics, California State University, Fullerton, Fullerton, Calif.
Read Full Article Here: https://www.cpajournal.com/2017/11/20/characteristics-financial-restatements-frauds/