European Union: Country-by-Country Reporting Data—Accounting or Tax Information?

Bloomberg BNA has highlighted an issue of enormous public significance, even if it might seem to be deeply technical and inconsequential to most people. The matter in question is whether country-by-country reporting (“CbCR”) data is accounting or tax information.

The European Commission and the European Union (“EU”) Parliament both think it accounting data. They want, in varying degrees of detail and geographic spread, that information to be published for public use. The European Council of Ministers has obtained legal opinion that the information in question is tax data. The difference of opinion has enormous consequences. That is because accounting data is subject to Commission and Parliamentary control by majority decision. Tax data is, on the other hand, a devolved responsibility of Member States, and so subject to a requirement of unanimity when it comes to decision making at an EU level. Perhaps unsurprisingly many of the EU’s tax havens are desperate to oppose public CbCR for all large multinational companies. You would almost think these places really do want to be considered secrecy jurisdictions—and they have realized that the only way they can beat the Commission and Parliament is by securing this opinion in the Council.

So, who is right? The simple answer is, of course, that legally no one knows as yet. The only way to resolve the impasse if negotiation cannot do so is by referral to the Court of Justice of the European Union (“CJEU”) for them to decide. But that does not stop me offering an opinion, and as the creator of the CbCR concept I think I have some right to do so.

In my opinion CbCR is now, always has been, and was always intended to be, accounting data. I cannot by any stretch of the imagination think it could be classified as tax data. Let me offer the arguments.

Tellingly my very first version of CbCR data was written as a draft accounting standard. Published in 2003 http://visar.csustan.edu/aaba/ProposedAccstd.pdf  it had the title ‘A Proposed International Accounting Standard: Reporting Turnover and Tax by Location’. The similarity between what I proposed and what became the OECD CbCR tax template and so the EU’s DAC 4 (4th Directive on Administrative Cooperation) proposal is almost uncanny. But that is not surprising. My intention was unambiguous: what was desired was an accounting standard to ensure that the public had the data required to hold multinational companies to account for the payments they made to individual tax authorities, as well as sufficient further accounting data to indicate whether or not the profits declared and tax paid in a location were reasonable in the overall context of its economic activities as a whole.

The idea was quite quickly taken up by civil society. The Publish What You Pay coalition was first to adopt it as part of its campaign to hold companies to account for payments of tax that they made. Quite explicitly, though, this was not in the context of assessing tax due. It was in the context of beating corruption relating to tax payments in the extractive industries.

So they, and I, campaigned for this data to be included in accounting standard IFRS 6 on the extractive industries, and when that failed we demanded that it be included in IFRS 8 on segment reporting. This failed when an IFRS board member in open session said that CbCR looked as though it might relate to transfer pricing, and felt that was something they did not want to go near.

More importantly though, in the extensive discussions on IFRS 6 and IFRS 8 that took place with the International Accounting Standards Board, I do not recall anyone saying this was not accounting data: it was simply agreed that this was accounting data that accountants really did not want their clients to have to publish, which is something quite different.

What no one said then was that this was tax data, which it is not. That is because no one, anywhere, will tax a company in CbCR data. No one has said they should. All that anyone including the OECD says, is that CbCR data is accounting data that can, among other uses, be used for the purposes of tax risk assessment: and it’s only indicative and not definitive for that purpose. It’s just an accounting tool. A tool which can also, importantly, also be used to analyze supply chains, geopolitical risk, employment patterns, investment patterns and a great deal more, none of which are in any way related to tax—making the claim that this is tax data almost impossible to sustain, but making the case that this is accounting data that should be in the public domain if multinational corporations are to be held to account for their actions almost unanswerable, at a time when this is a near universal political demand capable of rocking democracy to its core.

So let’s stop the nonsense: information extracted from a company’s general ledger that is not used for tax assessment purposes and never will be cannot be tax data. It’s accounting data and to argue anything else, just because the OECD were persuaded to share the NGO view that this was enormously useful for tax risk assessment purposes, is absurd—or incredible—or just wrong. In which case there is only one decision the CJEU could ever make in this issue, in my opinion. 

Source: Bloomberg BNA

What Oreos can teach accountants about growing their firms

Accountants who want to grow revenue by adding new services should look to the Oreo cookie for a few lessons, according to Katie Tolin, a member of the Association for Accounting Marketing’s Hall of Fame and founder of CPA Growth Guides.

Tolin, who recently led a webinar for accountants on launching new services, noted that the Oreo cookie has been around for many decades, and it has probably been in the mature stage of its life cycle for a while.

Tolin noted that accountants offer several key services that are in the mature stage too. “Your accounting, audit and tax services, they’re all pretty much mature services”, she said.

Mature products and services often see slowing sales and more competition willing to discount prices, a scenario that typically leads to lower profits and eventual consolidation as the product or service is indistinguishable from competitors, Tolin noted.

And in the same way that most people know what to expect from a basic Oreo (two thin chocolate wafers sandwiching a creamy filling), they typically know what to expect from an accountant providing audit, tax or general accounting services. Many accounting firms are in a “sea of sameness” with their core services, Tolin said.

But Oreo’s parent company (Mondelez International and all of its predecessors, including Nabisco) has been able to create excitement and new revenue for the Oreo brand by taking the mature product and spinning off new products. Oreo has dozens of spin-off products, including Golden Oreos, fudge-covered, Double Stuf, reduced fat, mint-flavored, birthday cake, mini Oreos, Triple Double Chocolate and even Candy Corn Oreos around Halloween.

The lesson for accounting firms, according to Tolin, is they should take advantage of the numerous opportunities they have to innovate their existing services and create entirely new services, new packages of services or new methods of delivering their services.

“We can’t change the tax forms, but it’s in how we deliver the tax services that could easily be a differentiator”, Tolin said.

Innovation can take many forms, but it is what will differentiate your firm, she pointed out. Some firms are innovating by launching advisory services, such as business valuations or financial services. Other are acquiring firms that provide services outside of tax and accounting to provide more options under one roof for their clients.

Innovation may involve adding value to a service, reducing costs, or both. For example, technology has completely automated tax services. Technology can also be used to automate more of the audit process, which can reduce costs if staff have to spend less time on site conducting fieldwork and can add value if the automation results in the firm having fewer requests of the client. Tolin said some of the best ways to generate ideas for innovative solutions include asking staff, asking clients, evaluating complaints and watching the competition.

One option for innovation is to consider ways to “productize” services. Productization involves making an intangible tangible—providing something that helps the client understand a complete offering that is focused on benefits and easier to market.

For example, Ohio CPA firm Rea & Associates has created a specialized valuation product, Know & Grow Your Value, to give business owners a cost-effective way to determine their company’s worth and to help them plan for the future. Other firms create products around risk management or technology consulting.

Tolin said during the webinar that packaging existing services into new offerings that include bundled, tiered or free value-add services can help the firm market the services more effectively.

Tolin said accountants have many examples to review when it comes to companies that have innovated and found new ways to grow revenue from existing products or services. Starbucks, for example, took a commodity— coffee—and created an entire experience around the act of drinking a cup of coffee. People are willing to pay $4 or $5 for that experience, and the company sells all kinds of products related to drinking coffee or loving coffee.

“Starbucks started the trend of differentiating that cup of coffee”, Tolin said. “And the company continues to mix it up. They continue to create an experience around their cup of coffee”.

Source: Accounting today

Este es el nuevo diseño de la tarjeta profesional de contador público

mincitLa Junta Central de Contadores (JCC) informó que desde este año cambiará el diseño de la tarjeta profesional de contador público. No es un simple cambio estético, ya que la nueva versión incluye sello táctil, microtextos, imágenes de contraste ultravioleta y una marca de agua digital que interactúa con la app Secure Doc que permite revisar la autenticidad del documento. Aquellos que tienen el diseño verde no tendrán que hacer el cambio de manera obligatoria, aunque el director de la JCC le dijo al INCP que recomendaba hacer el cambio. Leer más

Aquí está el nuevo cronograma de convergencia para entidades públicas

contaduriageneralTal como lo había anticipado el Contador General de la Nación, Pedro Luis Bohórquez, se publicó la Resolución 693 de diciembre 06 de 2016 “Por la cual se modifica el cronograma de aplicación del Marco Normativo para Entidades de Gobierno, incorporado al Régimen de Contabilidad Pública mediante la Resolución 533 de 2015 y la regulación emitida en concordancia con el cronograma de aplicación de dicho Marco Normativo”. La preparación para la presentación de la documentación según los nuevos parámetros –creados a partir de los comentarios hechos por entidades nacionales e internacionales– será con base a los estados financieros del 31 de diciembre del 2017. Leer más

Elementos a tener en cuenta para la implementación del catálogo único de información financiera para el sector público

contableCuando se hace una revisión del Catálogo Único de información financiera con fines de supervisión del sector solidario, se pueden identificar algunos elementos que en ciertos casos pueden llegar a ser confusos o contradictorios. Uno de estos casos es no poder ver la diferencia entre los costos de producción y los gastos de venta (en NIIF costos de disposición), puesto que allí se determina como si el costo de producción fuese parte de las cuentas que van directamente al estado de resultados. Para mayor claridad, un costo de producción tiene tres etapas, la primera son los egresos que se producen de los productos que están en proceso de producción, luego estos egresos pasan a ser parte del inventario de producto terminado, y la tercera fase es cuando este se vende y se puede determinar como un gasto o costo de venta. Leer más

IFRS and Vietnamese accounting standards: critical differences

International Financial Reporting Standards (IFRS) are global accounting standards issued by the International Accounting Standard Board (IASB) to guide the preparation and presentation of financial reports. Vietnam uses IFRS as a basis for its own system, the Vietnamese Accounting Standards (VAS).

To provide guidance for local and foreign enterprises in Vietnam, the Ministry of Finance recently issued circulars meant to enhance the comparability and transparency of corporate financial statements.

But there are key differences between the two that CFOs and others on the finance team must know when setting up in Vietnam.­ All foreign and local companies operating in Vietnam are obliged to conform to VAS, so foreign investors should be well aware of unique fundamental characteristics of VAS to fully comprehend compliance requirements and make informed investment decisions.

To provide guidance for local and foreign enterprises in Vietnam on the 26 Vietnamese Accounting Standards so far issues, the Ministry of Finance recently issued Circulars No. 200/2014/TT-BTC and No. 202/2014/TT-BTC. These are meant to enhance the comparability and transparency of corporate financial statements and bring the two systems closer.

Key differences between IFRS and VAS include terminology, applied methods or presentation scope. Below are several critical differences between the two financial reporting systems.

 

Presentation of financial statements

A complete set of financial statements based on IASB’s International Accounting Standard (IAS) 1 includes the following:

  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Statement of Changes in Equity
  • Notes, including a summary of significant accounting policies and other notes

 

The components of financial statements under VAS are:

  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Notes

According to VAS 21, the Statement of Changes in Equity is part of Notes, rather than a primary component of the financial statement. Furthermore, VAS does not require disclosure of management’s key judgments, assumptions about the future and sources of estimation uncertainty.

 

Cash flow statements

Under IFRS 7, cash flow statements are based on the balance sheets from the first and final period accounting reports, and can include some information from the ledger. IFRS stipulate that receivable accounts and trade payables can be separated from receivable accounts and payables on the sale of fixed assets or long-term assets. Hence, cash flow from business is distinct from cash flow from financial investment.

In Vietnam, based on VAS 24, cash flow statements are taken from the cashbook and ledger bank deposits corresponding to the side account. VAS 24 gives guidance on setting up the cash flow statement using the indirect method starting from pre-tax profits plus or minus the adjustment, including differences of payables and excluding payables related to financial investment activities.

 

Chart of accounts

Vietnam’s Ministry of Finance issued a uniform chart of accounts for enterprises’ financial statements. Circular No. 200/2014/TT-BTC introduced new accounts, including corporate restricting funds (Account 417) and price stabilization funds (Account 357), while some are omitted or amended.

Source: CFO Innovation – By Dezan Shira and Associates

Revised key standards for insurance accountants

The long overdue restructuring of accounting for insurance contracts is now on our doorstep. There are many proposals, and the International Accounting Standards Board’s publications deliver continued clarifications.

Just-in-time, the board puts forward suggestions for the implementation of revised key standards affecting the insurance industry. Relevant standards will be coming into effect in the medium-term, these being, IFRS 9 Financial Instruments (published, effective January 1, 2018) and IFRS 15 Revenue from Contracts with Customers (published, currently proposed to be effective by January 1, 2018).

IFRS 4 Phase II Insurance Contracts is not yet published and its effective date is expected to be approximately three years after that standard is issued.

IFRS 4 Phase I Insurance Contracts left many gaps in view that its implementation, which dates back to 2004, was intended only to enhance disclosure requirements for insurance companies and serve as a temporary fix, while a more formal re-evaluation of insurance accounting took place.

 

Insurers need to consider options and elections available under IFRS 9

Standard-setters argue that, while insurance contracts expose entities to long-term and uncertain obligations, its accounting does not provide existing and potential investors, lenders and other creditors with the information they need to understand the financial statements of insurers and compare financial data between market players.

The proposed remedy is a single-accounting approach aiming at:

  • Making use of observable market data to measure the entity’s obligations – ensuring that the economic cost of the insurance contract will be transparent;
  • Discounting liabilities to factor in the time value of money for expected future payments;
  • Emphasising the characteristics specific to insurance contracts rather than assets held by the entity, thereby depicting a better picture to users of the level of risk from the investment activity;
  • Providing investment information separate from underwriting performance; and
  • Recognising insurance contract revenue in a comparable way to non-insurance entities.

Despite the significant benefits that are expected to emerge, a critical area within the current proposals that remains is volatility.

Volatility in profit or loss and equity may be created due to the use of current assumptions in measuring insurance liabilities or due to changes in the values of minimum guarantees arising from short-term market rate fluctuations.

The accounting treatment of the corresponding investment portfolio – and, therefore, the adoption of IFRS 9 – plays an important role in managing such volatility. Although the permissible measurement bases for financial assets – amortised cost, fair value through profit or loss and fair value through other comprehensive income – are similar to IAS 39 Financial Instruments: Recognition and Measurement, the criteria are significantly different.

Insurers, therefore, need to consider options and elections available under IFRS 9 and the forthcoming insurance contracts standard to minimise the mismatches between the accounting for insurance contract liabilities and the financial assets held to back them.

Ensuring financial assets are classified appropriately under IFRS 9 will require insurers to determine the objective of the business model in which the financial assets are managed, and, where relevant, analyse the contractual cash flow characteristics of financial assets. Naturally, entities holding financial assets at amortised cost will face more significant initial volatility upon initial application of the standard.

With respect to the revenue stream of an insurance company, the board iterates that revenue from insurance contracts should be consistent with that from non-insurance contracts, in effect implying the application of IFRS 15.

Although this new revenue standard does not apply to insurance contracts, it may be relevant to other arrangements an insurer may take on – such as asset management, insurance broking and claims handling. Insurance companies should therefore determine which contracts fall entirely, or partially, in scope of the new revenue standard through a comprehensive review of contracts with customers. The insurance accountant will then apply the new revenue recognition standard to any such non-insurance agreements or non-insurance components within insurance contracts.

The effects of applying IFRS 4, IFRS 9 and IFRS 15, once endorsed by the EU, are being largely debated across the market. The IASB permits and encourages early adoption of IFRS 4, allowing companies to allocate efforts and resources to formulate the best approach towards implementing these standards simultaneously, aiming to avoid changes in consecutive periods.

Insurance entities are already undergoing an operational challenge with the upcoming Solvency II, effective from January 1, 2016. We view as an imperative the need now for insurance accountants to understand the ways in which the requirements of the new IFRSs can be incorporated with SII’s groundbreaking change.

Having a single internal governance process that looks at the entity’s reporting under each of these frameworks together and using a single set of analytical reviews and approvals will ensure that any inconsistencies are identified, discussed and thoroughly understood by management before going live. Deferring the amalgamation of such standards is sure to place an entity doing so at a disadvantage against the forward-looking market player.

Source: Timesofmalta.com – By Marika Azzopardi and Giselle Borg

Accounting Standards: Prudence redux

The International Accounting Standards Board says it has listened to long-term investors and is considering the reintroduction of the concept of prudence into its conceptual framework.

The Conceptual Framework for International Financial Reporting Standards (IFRS) starts with the premise that the objective of what the International Accounting Standards Board (IASB) calls general purpose financial reports is to provide information that can help when making decisions. That is, information that is “useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity”. 

Those decisions capture such activities as buying, selling or holding equity and debt instruments, as well as providing or settling loans and other forms of credit. The IASB now wants to add a reference to “[investors’] assessment of management’s stewardship of the entity’s resources” and also reintroduce prudence as a characteristics of useful financial statements.

The Conceptual Framework, as well as defining the objective of general purpose financial reporting, also details two fundamental qualitative characteristics of useful financial information – relevance and faithful representation.

Under these two characteristics are four so-called enhancing qualitative characteristics – comparability, verifiability, timeliness and understandability. Putting all those pieces together, financial information will be useful, if it is relevant – that is, has a predictive and confirmatory value based on the nature or magnitude, or both, of the item it relates to – and faithfully represents what it purports to represent.

In other words, it must be complete, neutral and free from error. Moreover, the usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. This has been the position under the IFRS Conceptual Framework since 2010.

The Framework was first approved by the IASB’s predecessor, the IASC Board, in April 1989. The IASB adopted it in April 2001. Then in September 2010, the IASB revised the objective of general purpose financial reporting and the qualitative characteristics of useful information. The move was driven largely by the rush to converge the Conceptual Framework with the position in the US.

One of the casualties of that stalled convergence effort was prudence. The IASB’s roadmap for killing off prudence is set out in gory detail in a May 2005 IASB meeting paper. In paragraph 13 of that paper, the IASB staff team wrote: “Reliability is said, in FASB Concepts Statement 2, to comprise representational faithfulness, verifiability, and neutrality, with an overlay of completeness, freedom from bias, precision, and uncertainty. It is said in the IASB Framework to comprise faithful representation, substance over form, neutrality, prudence, and completeness.”

The problem facing the staff – and indeed the board – was that although they took the view that “the inclusion of neutrality [was] a non-issue”, it clashed with the accounting traditions of prudence and conservatism. And, if anything had to give back in 2005, it was never going to be neutrality. Staff explained:

“You might detect some lack of neutrality in the staff‘s choice of words in that last sentence, which of course is intended to influence your decision on the next cross-cutting issue in order to achieve a recommended, though not predetermined, result! That heavy-handed humor is actually intended to remind you of the need for and value of neutrality in financial reporting standards.”

The American-English spelling of humour is perhaps no accident. First, against the backdrop of the rush to converge, it was a foregone conclusion that the IASB would land on an aligned position with the FASB’s definition of neutrality – the absence in reported information of bias intended to attain a predetermined result or to induce a particular mode of behaviour.

And the decision to dump prudence was really the kind of arcane development in accounting that it was, no doubt, easy to overlook. Back in 2005, the global economy was booming: banks were too big to fail, so it was thought, and politicians had abolished boom and bust.

But for some investors at least, prudence does matter. In a letter to the Financial Times dated 16 February 2015, one group of investment luninaries, among them Iain Richards of Threadneedle Investments, as well as Roger Collinge of the UK Shareholders Organisation, repeated their long-standing demand for the IASB to bring back prudence – as an overriding accounting principle.

The investors wrote: “Most importantly, prudence should be restored as the overriding accounting principle so that capital and performance are not overstated. The breakdown of realised and unrealised income should be visible to all.”

 “These changes are not just vital for effective stewardship by executives, directors and shareholders; they are necessary to bring the accounting framework back into line with existing legal requirements for capital protection as originally set out in the EU’s second directive.”

But not every investor shares this vision. Former UBS sell-side analyst-turned-IASB member Stephen Cooper recently wrote in an IASB publication: “It is also important to remember that applying a conservative bias would be likely to provide investors with information that is less relevant for their capital allocation decisions, unless somehow they knew the degree of bias being applied and could therefore make their own corrections.”

The solution, he concluded, is to “apply IFRSs in a prudent but neutral and unbiased manner”. And so in its latest proposals to amend the Conceptual Framework, the IASB has proposed to reintroduce prudence in the following terms: Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated.

Long-standing IFRS critic Stella Fearnley, a professor of accounting at Bournemouth University, says the IASB has lost sight of the true purpose of financial reporting: “You have to ask yourself what matters about audited financial statements? You want to be able to believe the numbers in them, you want to be able to believe the audit report, and you want to believe that the accounts show the economic substance of the business. In other words, you want to be sure that the profits really are profits and the assets really are assets. And if that is your destination, I don’t think you get there by talking about accounts being neutral or faithfully representated.”

“If you step back from the May 2005 meeting paper, you have the feeling that the IASB is not overly concerned with the consequences of its standards. It is as if they are in a hot air balloon talking about debits on pinheads.” They are developing standards that suit the profession but they are not setting standards with any consideration as to how they might be audited. Put another way, they have ignored long-term investors, which means they have also ignored most of the pension funds and written, instead, accounting standards for day traders.

Professor Fearnley says that the IASB, back in 2005, was hunting around for a justification for the conceptual model it was determined to bring in: “They have elevated the status of decision-usefulness but totally ignored stewardship. However, that is all about whether directors are running a business properly and discharging their own duty or not.”

“And so we end up with ‘relevance’ and ‘faithful representation’ as if they were some sort of alternative to reliability. Similarly, we have verifiable information, although that isn’t much use if you verify it to something that is unreliable – like the banks’ valuation models.” 

Source: Investment & Pensions Europe – By Stephen Bouvier

Accounting issues mask a seller’s true value

Five accounting issues to be aware of when analyzing the financial reporting of a target company.

In a frothy M&A market, you can bet that some CFOs and their management teams, somewhere, are acquiring more trouble than they bargained for — and a lot less value than what they paid for.

In the first half of 2015, aggregate acquisition purchase prices increased almost 50%, to $1.7 trillion, the highest level in 10 years. Meanwhile, the median enterprise value to EBITDA multiple increased to 12.2x — also the highest level in more than decade.

Many studies have shown that acquisitions tend to underperform. Aggressive accounting practices on the part of target companies can mask the true economic value of acquisitions, exposing boards, management, and CFOs to reputation, career, and legal risks when expectations do not materialize.

Revenue-cycle working capital issues: revenue recognition is the most common area of financial fraud and financial engineering. While there are dozens of ways to manipulate revenue, method and intentions are irrelevant. Acquirers should be solely concerned with the question of whether reported revenue (or revenue growth) is sustainable.

The easiest way to assess revenue sustainability is to evaluate revenue-cycle working capital: receivables and deferred revenue. Is the target firm collecting cash for its sales? Are customers still making upfront cash payments? Many companies and their advisers overlook this kind of analysis.

A case in point is one of the largest U.S. healthcare consulting firms. In April 2015, the $1 billion company acquired a smaller firm to provide “new competency in areas” strategic to growth. The acquired firm was growing revenue at 15.1%. That level of growth may have justified a purchase price equivalent to 4.2x revenue, nearly double the multiple of comparable firms.

However, the acquired business experienced a significant increase in days sales outstanding. The revenue quality of the acquired business clearly deteriorated and revenue growth is likely unsustainable.

Non-GAAP financial statements: companies use non-GAAP adjustments to more accurately reflect the underlying business economics. In many instances, however, aggressive non-GAAP adjustments have the exact opposite effect: The true economics of the business are obfuscated by deceptive, non-GAAP reporting.

Widespread adoption of non-GAAP financial reporting by investors has resulted in valuations (and acquisition purchase prices) based on non-GAAP financial metrics. Accordingly, it is important to assess whether a non-GAAP adjustment better reflects or clouds economic reality.

In 2014, for example, a multi-billion dollar health-care company made more than $1 billion in acquisitions. Much of the acquired assets were capitalized as intangible assets, which largely reflect research and development efforts at the acquired firm. However, the acquirer excluded amortization of acquired intangibles from its non-GAAP financials. The amortization of intangibles is just a different form of research and development, and the exclusion of these expenses muddied the underlying economics of the business.

Changes in financial statement disclosure: financial statements are heavily scrutinized to minimize legal risk before being filed with the Securities and Exchange Commission. Accordingly, every change in an SEC filing is meaningful and can be easily identified in the blackline filings (filings that show additions, deletions, and changes — available from most data providers). Occasionally, the blackline financial disclosure will highlight material information not readily disclosed to investors or potential acquirers.

Consider, for example, a $1 billion electronic material and equipment provider. In August of last year the company provided guidance for fiscal year 2014 revenue of $600 million to $700 million and said that it expected “non-GAAP EPS to be $0.12 to $0.18, which is at the high end of our previous range.”

Then, in the company’s second-quarter 2014 10Q filed just two days later, the company added multiple new risk factors to its filing and disclosed that a large customer had “no minimum purchase obligation.” Additionally, the company noted that its large debt burden would result in default if it didn’t produce “significant revenue” from that large customer. The company filed for bankruptcy less than two months later.

Selective financial reporting: companies often engage in selective financial reporting to obscure unfavorable, underlying trends. Selective reporting tactics include ceasing disclosure of key performance indicators, changes in segment reporting, lack of pro forma financial results, and changes in non-GAAP reporting, among many other tactics.

One of the largest consulting firms in U.S., for example, completed nearly $2 billion in acquisitions in the past three years — but did not disclose pro forma financial results. This type of selective reporting conceals the underlying growth trajectory of the legacy business.

Similarly, the largest manufacturer of recreational vehicle in the U.S. recently changed its segment reporting in a way that serves to hide the growth rate of the company’s largest segment. Such changes may be symptomatic of the acquisition target’s corporate culture.

IT system implementations and internal controls: while the goal of an IT system upgrade, such as enhancements to an enterprise resource planning (ERP) system, is to streamline business operations, the implementation process may increase the risk of accounting irregularities and inconsistent financial statement reporting. Financial reporting miscues from implementation issues may be exacerbated if a company is converting or consolidating multiple information systems. Persistent system implementation issues may be indicative of company-wide under-investment in information technology.

In 2013, a provider of orthotic and prosthetic services and products announced the planned implementation of a clinical management and billing system that would continue through 2016. The system implementation was designed to improve previously decentralized and potentially manual processes. In 2015, the company announced certain misstatements dating back to 2012. The misstatements included items related to billing data and invoicing controls. The company had under-invested in information technology, which resulted in the misstatements.

Source: CFO – Alex Cook