September 18, 2018

SOX 404 Not Helping: Study

A recent study by Sarah Rice of Texas A&M and David Weber and Biyu Wu of the University of Connecticut has found that everyone's favorite section of the Sarbanes-Oxley Act of 2002 is falling short on expectations:

The study, which appears in in the new issue of the American Accounting Association’s journal The Accounting Review, found that not only do companies that give advance warning of internal-control problems gain nothing by their transparency but they are actually penalized compared to companies that divulge such problems only when forced to restate their finances, which is too late to be of help to investors.

Wait, wait, wait, wait, wait. Are they saying that a company, in the spirit of the law, that discloses internal control weaknesses in a timely fashion is no better off than if they just keept their traps shut about it until it's too late?!   

Yep, that's what they're saying.

"We find no evidence that penalties following a restatement are more likely for firms that fail to detect and disclose their control weakness as required,” said the study. “Instead, firms that do report their control weaknesses in a timely manner are generally more likely to face [varied] penalties in the event of a later restatement. These results are consistent with the disclosure of control weaknesses making it difficult for management to plausibly claim later that they had been unaware of the underlying conditions in the control environment that led to their restatements." 

Welp. Shall we pack it in then, opiners? 

[AT]

Related articles

A Wisconsin Non-Profit Learns an Important Lesson in Internal Controls

Presented by Serenic Software. Download our free whitepaper – “5 Key Reasons Why Great Financial Management is So Important for Your Nonprofit Now”

What is in the water up in America’s Dairyland? We’ve been going on and on about the internal control failures at Koss in Milwaukee but now there’s more of it at a non-profit organization just up the road. Let’s hope everyone at UW Madison is taking notes.

The latest tale of non-profit fraud stars 56 year-old Leonard V. Lauth of Beaver Dam.

Wings Over Wisconsin bills itself as a conservation organization dedicated to natural resource preservation and education through youth and community involvement. Spelling errors and obvious lack of updates since 2006 on its website aside, WOW manages nearly 1,300 acres of land and provides mostly young hunter education to the future gun-toting blue-stater babes in Wisconsin.


While it prides preservation of Wisconsin’s precious wetlands, internal controls do not appear to be high on WOW’s priority list. Hopefully this changes that.

It’s a textbook fraud case, starting with the mounting medical bills and the poor internal controls that allowed its Treasurer to lift $16,875 since 2005. Lauth’s advanced methods of fraud include writing checks to himself labeled “office supplies” in the books and taking home banquet funds after the event insisting he’d deposit them at the bank in the morning.

While typically WOW practice to require two signatures, Lauth had been with the organization for 24 years, leaving the “trust” issue totally taken care of. Opportunity, motive, what else do we need?

Rationalization, of course! Lauth told Beaver Dam Police Lt. Joel Kiesow he thought he’d taken $788 from the organization in the four year period in which he executed his fraud. When informed it was more like $17,000, Lauth was shocked. I guess he didn’t realize how expensive “office supplies” can be these days.

“Maybe I was robbing Peter to pay Paul on different things,” said Lauth in regards to using WOW funds to pay off family medical bills. Actually, he was robbing the little Dustins and Bobbys with their baby shotguns and wildlife of Wisconsin who counted on the funds to which he so sloppily helped himself. Shame shame.

Let this be a lesson to all you non-profits: cash management and financial literacy (including fraud prevention measures) are not only best practices for public companies and private industry. If anything, non-profits need sharper internal controls – without shareholders to answer to, money can easily slip into the fraud vacuum undetected for years, as in the case of Mr Lauth and WOW.

Calls to WOW left after business hours were not returned.

Man accused of taking funds from non profit [Beaver Dam Daily Citizen]

KPMG Has Gotten Tired of KV Pharmaceutical’s Financial Reporting Side Effects

Last week we ran a post courtesy of Sheryl Nash at CFOZone that discussed the tough 2010 that KV Pharmaceutical was having. Well, it’s getting worse. KPMG, not completely adverse to risk,ps and has dropped KVP like a sack of spuds.

In an 8-K rammed through just before quitting time yesterday, “On June 25, 2010, KPMG LLP (“KPMG”) notified K-V Pharmaceutical Company (the “Registrant” or the “Company”) that it had resigned from its engagement as the Registrant’s principal accountant. KPMG’s resignation was not recommended or approved by the Audit Committee of the Registrant’s Board of Directors.”

What was the problem, you ask? Where do we start? There’s a lot in this 8-K so we’ve bolded the good parts for you:

KPMG’s report on the consolidated financial statements of the Registrant and subsidiaries as of and for the year ended March 31, 2009 contained a separate paragraph stating that “As discussed in Note 3 to the consolidated financial statements, the Company has suspended the shipment of all products manufactured by the Company and must comply with a consent decree with the FDA before approved products can be reintroduced to the market. Significant negative impacts on operating results and cash flows from these actions including the potential inability of the Company to raise capital; suspension of manufacturing; significant uncertainties related to litigation and governmental inquiries; and debt covenant violations raise substantial doubt about the Company’s ability to continue as a going concern.”

The audit report of KPMG on the effectiveness of internal control over financial reporting as of March 31, 2009 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles, except that KPMG’s report indicates that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2009 because of the effect of material weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states “Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).

We’ll interject here with…why didn’t they just admit, “We have internal controls in place but they suck. Every last one of the controls is ineffective and we’re really not sure they’re being performed anyway. In fact, we don’t even employee people with accounting degrees. We have a weekend COSO crash course to get temps up to speed.” ?

Back to the filing:

As of the date of their resignation, KPMG had not completed the audit of the consolidated financial statements and the effectiveness of the internal controls over financial reporting of the Registrant as of and for the year ended March 31, 2010. KPMG had informed the Audit Committee prior to the date of their resignation that upon completion of their audit of the consolidated financial statements as of and for the year ended March 31, 2010 they expected their audit report would contain a separate paragraph expressing substantial doubt about the Registrant’s ability to continue as a going concern and their report on internal controls over financial reporting would indicate that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2010 because of the effect of material weaknesses reported as of March 31, 2009 that had not been remediated.

We’d continue but it’s probably not necessary.