Name major categories on Improper Accounting Practices

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:

  1. Improper revenue recognition (25% weightage)
  2. Improper expense recognition (20% weightage)
  3. Improper accounting in connection with business combination (4.5%)
  4. 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

OthersĀ  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

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.