This week’s GAAP Flash includes articles about an SEC enforcement action stemming from an accounting fraud associated with an entity managing earnings using the tax provision calculated under ASC 740, a couple of instances involving the payment of bribes and the resulting FCPA fines, and SEC charges involving improper education and training for brokers about complex financial instruments that were sold to retail investors.

Weatherford Fined $140M for Accounting Fraud (September 27, 2016) – CFO (@CFO)

Weatherford International has agreed to settle accounting fraud charges with the Securities and Exchange Commission (SEC). The SEC said that “Weatherford fraudulently lowered its year-end provision for income taxes by $100 million to $154 million each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations.” This was accomplished by accounting adjustments that resulted in using a more favorable effective tax rate. Weatherford has agreed to pay $140 million in penalties. Two former senior accounting executives have also agreed to settle charges with the SEC.

How It’s Relevant: Earnings management or “cooking the books” has always been a hot topic in the world of accounting. In this case, management fraudulently managed earnings for financial gain using the income tax provision calculated in accordance with ASC 740. According to the article, “Weatherford allegedly benefited because it used artificially inflated stock to acquire numerous companies” and company executives received bonuses based on fraudulent numbers. Beware, the SEC is watching, and they continue to focus on financial reporting and disclosure fraud!

Although not directly related to this case, we’ve recently discussed the accounting for uncertain tax positions under ASC 740 in this post.

Och-Ziff to Pay $400 Million to Settle U.S. Foreign Bribery Probe (September 28, 2016) – Wall Street Journal (@WSJ)

Och-Ziff Capital Management Group LLC, a publicly traded U.S. hedge fund firm, is expected to pay $400 million in penalties to settle bribery charges. It is also expected that a subsidiary of Och-Ziff will plead guilty to the charges. The SEC and the U.S. Department of Justice is investigating Och-Ziff as to whether the firm violated the Foreign Corrupt Practices Act (FCPA). The charges stem from the firm’s involvement in paying millions of dollars in bribes to officials in various African countries. According to the article, “The penalty to be paid to the U.S. will be one of the largest-ever foreign-bribery settlements. It is the first criminal foreign-bribery case against a major Wall Street firm.”

How It’s Relevant: The FCPA, enacted by Congress in 1977, makes it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. FCPA violations can result in significant sanctions and/or civil enforcement actions. The SEC has continued to make it a priority to crack down on violations, with 19 enforcement actions announced thus far in 2016. For a primer on compliance with the FCPA, click here. Think you know the rules? Try out your luck with our quiz, Shades of Gray with the FCPA.

SEC Charges Anheuser-Busch InBev With Violating FCPA and Whistleblower Protection Laws (September 28, 2016) – SEC (@SEC)

A SEC investigation into an Indian unit of Anheuser-Busch InBev alleges that the company violated FCPA rules. Per the SEC, “the company used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of Anheuser-Busch InBev products in that country.” In addition to the FCPA violation, the SEC said that the company executed an agreement with a former employee that stopped the employee from discussing the potential FCPA violation with the SEC as the agreement included a non-disclosure clause that, if violated, imposed financial penalties on the employee. Anheuser-Busch InBev has agreed to pay $6 million to settle charges. Additionally, the company must report on its FCPA compliance efforts, while also making reasonable efforts to notify certain former employees that Anheuser-Busch InBev does not prohibit employees from contacting the SEC about possible law violations.

How It’s Relevant: We already discussed the SEC’s continued effort to police FCPA violations in the Och-Ziff case above. The SEC has another program, the Whistleblower Program, which allows persons who provide information leading to successful SEC enforcement, to receive 10 to 30% of the monetary, sanctions over $1 million. This program has been an invaluable source of information to aid the SEC in carrying out its mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” As of the end of August 2016, the Whistleblower Program has resulted in over $100 million in awards being paid out to whistleblowers. This seems like an awful lot of money just to do the right thing!

SEC Says UBS To Pay $15 Million Over Sales Practices (September 28, 2016) – Reuters (@Reuters)

The SEC has been busy this week! Here is another article regarding an SEC enforcement action. UBS Financial Services has agreed to settle charges that it failed to adequately train its sales force about critical aspects of certain complex financial products that it sold to investors. According to the SEC, UBS sold reverse convertible notes (RCNs), complex derivative instruments, to inexperienced retail investors. While derivatives are known to be complex financial instruments that can be volatile, UBS brokers stressed the higher yields from these investments to retail investors versus the volatility. Per the article, “from 2011 to 2014 [UBS] sold about $548 million of ‘reverse convertible notes,’ derivatives tied to individual stocks, to more than 8,700 retail customers.”

How It’s Relevant: The SEC is responsible for “protecting investors” and this is a good example of where they are doing just that. Per the article, this “case is part of a years-long crackdown by the SEC, the Financial Industry Regulatory Authority and other regulators to stop banks and brokerages from selling products that retail and even professional customers may not want, need, or understand.” Additionally, the SEC used big data analytics, indicating in their press release that they “can now analyze literally hundreds of millions of trading records using sophisticated coding techniques that allow us to build platform wide cases rather than cases built investor by investor.” Data analytics is a growing area of interest to auditors as it can be a powerful tool in improving audits through the use of technology. Obviously, it’s a powerful tool for the SEC too! You’ve been warned.