The SEC study, Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002 review 515 enforcement actions between July 31 1997 and July 30 2002 classified improper accounting practices into four categories:
- Improper revenue recognition (25% weightage)
- Improper expense recognition (20% weightage)
- Improper accounting in connection with business combination (4.5%)
- Other accounting and reporting issues ( 50.5%)
Improper revenue recognition includes the following:
- Reporting revenue in advance through techniques like holding the accounting period open, billing without shipping ( bill and hold),
- Fictitious revenue
- Improper valuation of revenue
Improper expense recognition includes the following:
- Improper capitalization
- Overstating inventory
- Understating bad debts/loan losses
- Improper use of restructuring reserves
- Failure to record asset impairments
Others accounting and reporting issues includes the following:
- Inadequate disclosures
- Failure to disclose related party transactions
- Inappropriate accounting for nonmonetary and round-trip transactions
- Improper accounting for foreign payments in violation of the Foreign Corrupt Practices Act
- Improper use of off-balance sheet arrangements
- Improper use of non-GAAP financial measures
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