regulators

Mortgage fraud continues to soar

Jim Kim — Thu, 28 Aug 2008 21:05:47 -0400

With regulators looking at all aspects of the real estate industry, and with Sarbanes-Oxley a perpetual boardroom presence, you would think that mortgage fraud would have peaked by now. But guess what? A new study by the Mortgage Asset Research Institute has found that the number of fraudulent loans issued from January to March of 2008 rose 42 percent compared with the same period in 2007. Whew! A CNNMoney articles suggests that all the changes in law, which have made it harder for people to qualify for loans, have created incentives for people to fudge. It's just so easy to tweak an application. The most common type of fraud seems to be that which involves false employment or income. This confirms what has been long said about Sarbox: If people really want to commit fraud, they will find a way. But there should be better controls in place for this.

For more:
- here's the article

What to do: Tax-related weaknesses on the rise

Jim Kim — Fri, 01 Aug 2008 07:38:41 -0400

While companies (especially large cap companies) have made progress in reducing material weaknesses, one problem area sticks out: tax-related weaknesses. Financial Week notes that while the number of material weakness has dropped by 44 percent since 2005 (again this is mostly a large cap trend), tax-related material weaknesses have fallen by only 25 percent. What's more, incidences of tax-related weakness in the first six months of 2008 is up 12 percent compared with the first half of 2007--123 vs. 106. The sheer complexity of the issues involved can easily overwhelm a company's expertise. In such an environment, controls are going to be ineffective, if they exist at all. Regulators, however, are taking a closer look and building their expertise, so the issue cannot he ignored. Richard Larsen, global director for risk services at Ernst & Young, recommends hiring a tax risk coordinator, whose first task should be to conduct a thorough risk assessment. Ultimately, he or she will build controls into the process. Getting some tax expertise on the board would help as well. Article

Business continuity as a compliance issue

Tue, 22 Jan 2008 06:59:59 -0500

Strictly speaking, business continuity is not seen as a direct Sarbanes Oxley issue. But the two are related. Sarbox does not contain an exemption for a disaster. Your records and processes will have to somehow endure and remain intact. A commentary in Forbes notes that a "well-designed BCP will enhance internal credibility (with employees) and external credibility and goodwill (with regulators, stockholders, customers, suppliers and the community at large)." So it is something to think about now. Especially, in today's global climate. However, this is not something that can be undertaken lightly. While CEOs and board members have rarely gotten involved, the times call for high-level attention.

For more:
- here's the commentary

Audit firms "forget" to register

Tue, 18 Sep 2007 06:59:59 -0400

This news seems almost fit for The Onion: Nearly 70 accounting firms and partners, which are charged with carrying out Sarbanes Oxley ethics reforms, have "forgotten" to register with the board that supervises the industry. "Oh yeah. That was, uh, a top priority," says one partner who was censured. "But let's face it, some summer interns just seem less diligent than others. Overall, we still see ourselves as detail oriented and a stickler for rules." The SEC is not laughing. But it settled the cases without fining any of the offenders. These firms aren't exactly moonshine outfits or unregulated betting parlors. Still, while unregistered, they conducted 53 audits for public companies. Some of them had previously agreed to return fees to clients. None of the big four firms forgot to register.

For more:
- here's an AP article via the New York Times

Related article:
- Accountants and firms charged with Sarbanes Oxley violations
- Sarbanes Oxley Act of 2002
-What's going on at the SEC?

Red flags for fraud, the F score

Mon, 09 Jul 2007 20:01:39 -0400

Everyone is looking for fraud these days. In fact, people are trying to come up with benchmarks aimed at grading companies on governance and compliance issues for investors and others. You should be aware of what they are looking for. Managing your perception, after all, is a task that cannot be overlooked. Here's an example. Patricia Dechow, an accounting professor at Berkeley's Haas School of Business, has come up with a list of red flags based on her review of SEC releases. She devised a Fraud-Score, or F-Score, to be used by auditors and regulators as a preliminary assessment of "earnings quality." Turns out that companies most likely to cook their books seem to be those with deteriorating performance, unusually high growth in sales but declines in profit margins, declines in order backlog and employee levels, high increases in off-balance sheet activity. Enron would have had a high score obviously.

For more:
- here's a release

Recruiter pain a signal of Sarbox uncertainty

Mon, 23 Apr 2007 20:01:39 -0400

Robert Half International, a big headhunter-type firm, has benefited from the rise of Sarbanes-Oxley. Like a lot of executive search companies, there was law-generated turnover that kept them busy. In addition, its Protiviti unit fared very well as demand soared for its independent internal audit and risk-assessment consulting services. So it really seemed to have hit the Sarbox sweet spot. But the company missed its first-quarter estimates. And the company guided analysts lower for the second quarter--to the 40 to 43 cents per share range. That compares with previous estimates in the 48 cents range. One issue seems to be that more companies are scaling back their risk-assessment work or putting off until the issues are better clarified. If more companies are scaling back, in a sense, that means the drive to narrow the scope of Sarbox is working. If they are merely postponing, we could see a really frenzied rush once, make that if, the guidance from regulators is made explicit. Interesting.

For more:
- here's the AP article via Forbes

Don't be another Radio Shack

Mon, 09 Apr 2007 20:01:38 -0400

Recall the data breach case involving information about customers of a Radio Shack store in Corpus Christi, Texas. According to documents filed last week, Radio Shack was found to be in violation of a Texas law requiring businesses to protect any sensitive customer data. The shocker of course was that regulators acted based on reports that company employees simply dumped customer records in bulk in garbage cans in an alley. The data included names, SSNs and even credit card numbers. Ouch! Texas is coming down hard. This goes to show that for all your compliance efforts, good old-fashioned horse sense may be your best protection. You can't drive it home strong enough, the repercussions of not-smart activity by employees.

Your audit committee might need a new focus, a risk committee

Mon, 05 Mar 2007 19:01:39 -0500

It's clear that audit committees today are quickly evolving into perhaps the most likely for controversy and perhaps even liability. It's not the posh job it was once. The problem is that the new focus comes on top of the old focus. So while many acknowledge the importance of risk oversight, the actual time devoted to the issue may be lacking, according to a recent survey by Ernst & Young. A majority of survey participants said 20 percent or less of the audit meeting time is devoted to risk. Also, only about half of audit committee say they receive necessary quarterly or monthly updates. The problem is worth addressing now. One idea would be to set up a risk committee. Currently, only 18 percent of companies have such committees, which would meet regularly with regulators (only 20 percent do that now) and set up an on-going risk evaluation and monitoring process. In general, the time issue is big one, given the twin burden of stepped up audit responsibilities and general board duties. Unsurprisingly, some companies have begun limiting the number of boards on which directors can serve. All in all, audit committee members are certainly earning their pay these days.

For more:
- here's a summary of the study from EarthTimes

Company makes Sarbox data feed available

Mon, 15 Jan 2007 19:01:39 -0500

AuditAnalytics.com has drawn a lot of attention from the regulators and financial types for its Sarbanes-Oxley data feeds, which offer information about compliance for specific companies. The company has just made a product available for money managers and institutional investors. The feeds package provides up-dated information on Section 404 and 302 disclosures and financial restatements for all SEC registrants. Each feed includes an option to add information about the auditors who signed off or were involved in the restatements, the text of the opinions and other communications. So we're living in world now where hedge funds and others will have instant access to your compliance records. They will be able to make hay with it as necessary. Not that that's a bad thing. But with lots of hedge fund money being put to work, these issues are basically ammunition--to which they have faster access. Get used to it.

For more on AuditAnalytics.com:
- here's a press release

Compliance fuels rise in internal investigations

Mon, 23 Oct 2006 20:01:39 -0400

One industry that seems to have benefited from Sarbox is the legal industry. The number of internal investigations led by outside attorneys appears to be growing fast. According to a recent Fulbright & Jaworski survey, litigation has also surged, as have arbitrations and regulatory proceedings. For attorneys, this is a virtuous cycle that doesn't appear to be abating anytime soon. The recent stock options scandals have been an added boost. While all this entails costs, the benefits from a compliance point of view are obvious. Such investigations send a message to regulators that a company is bent on correcting problems. The Securities and Exchange Commission and the Justice Department have made clear that a company's zeal in discovering problems can be a factor in whether they decide to bring an action.

For more:
- Here's the survey
- Here's a summary from the New York Law Journal
- Will D&O insurance cover the legal costs of the options probes? Article