Gotransverse
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Dec 04, 2013In a world of madcap financial shenanigans, the SEC just got more aggressive with its audit evaluation process. Earnings management policing is now carried out by a relentless and inhumanly efficient new automated tool aka “RoboCop.” Ferreting out dodgy accounting has become sexy for the government again. In this environment of microscopic oversight, how can corporations overcome stringent reporting requirements and prove they are on the up-and-up?
If you’ve been keeping up with the SEC’s latest regulatory priorities, you’ve no doubt seen some entertaining headlines and anecdotes about the recent directive of SEC chairman, Mary Jo White, and the agency’s renewed focus on policing earnings management practices. The effort has spawned the new Accounting Quality Model (AQM), which has been popularly dubbed RoboCop (based on a science fiction movie from 1987). RoboCop is a fully automated, analytic-technology based solution for rapidly evaluating new filings. All jokes about the name aside, the new approach is a game changer that must be taken seriously to avoid costly audits, fines or worse.
Checkpoints ahead: proceed with caution
The adoption of RoboCop has altered how the SEC operates by enabling more proactive reviews of corporate filings. Instead of waiting for investors or whistleblowers to raise flags, filings are now automatically reviewed within 24 hours of submittal. At the same time, all indicators are that the efforts of the SEC are focused and real as the SEC is starting to offer fewer “no admit, no deny” settlements.
In a nutshell what RoboCop does is flag potential high-risk activity in filings for closer inspection. Being caught in the snare is really only a problem if you aren’t adequately prepared to respond to an inquiry. RoboCop brings a new level of proficiency to the oversight game with the ability to do deeper analysis while significantly reducing historical challenges with false positives. At a high level, RoboCop works by comparing filings against peers and assigning scores based on common risk indicators. To improve accuracy, it uses innovative approaches to evaluating suspicious wording choices in filings, for example.
Raise your red flag… awareness
Clean, accurate, easily accessible data will be key to staying out of the SEC’s hot seat. And if your company still relies on manual, non-integrated revenue recognition processes, you may face significant obstacles and costs. For example, manual accounting systems allow multiple points of failure and make tracking down data for an inquiry or audit difficult.
Regardless of other factors, simply understanding what the SEC is looking for is an important start to avoiding deeper scrutiny. A successful filing will have a low risk score, based on key SEC criteria. Factors that increase your risk score can include:
- Mistakes and sloppy entries
- Unusual accounting choices
- Auditor musical chairs
- Off-balance sheet transactions
- Discretionary accrual vagaries
Automating to avoid the fringe and improve efficiency
The SEC’s more aggressive oversight provides yet another good reason to automate your revenue recognition processes. Through automation, you can set up rules that help you recognize revenue in ways that comply with SEC regulations. In a sense, it’s simply fighting automation with automation. And the benefits go well beyond making it easier to quickly track down data the SEC needs and demonstrate compliance. They also include time-savings and greater productivity that can significantly reduce overall costs, in addition to a better line of sight into deferred revenues.
To learn how TRACT by Transverse can help you more efficiently meet SEC requirements and streamline revenue recognition processes, please contact us at sales@gotransverse.com.