In this week’s GAAP Flash we discuss accounting fraud involving revenue recognition (SAB 104), assessing other-than-temporary impairment of investments (ASC 320), and the strong dollar and accounting for foreign currency (ASC 830). We end with a discussion of the Securities and Exchange Commission (SEC) and their crackdown on enforcement in FY 2016.

SEC Charges Energy Services Company and Executives With Accounting Fraud (October 17, 2016) – U.S. Securities and Exchange Commission (@SEC_News)

The SEC charged Lime Energy Co. and four of their executives with accounting fraud. The company is accused of improperly recognizing $20 million of revenue earlier than allowed under SAB 104 in order to meet internal targets. Lime Energy has agreed to pay $1 million to settle the charges.

How It’s Relevant: Earnings management is a constant hot topic in the accounting world. Auditors spend a great deal of time brainstorming on how management could manage earnings and design procedures to try to mitigate this risk. In this case, the company managed earnings through overstating revenues. Sometimes the guidance in ASC 605 and SAB 104 is open to interpretation, which may cause differences in the recognition of revenue. However, what this company did was straight up fraud!

Looking for a refresher on revenue recognition under existing GAAP (ASC 605 / SAB 104)? We’ve got you covered with this post.

Goldman Says U.S. Bondholders Risk a $1.1 Trillion Hit if Rates Spike (October 16, 2016) – Bloomberg Business (@business)

An analysis by Goldman Sachs says investors could face a $1.1 Trillion loss if interest rates rise by one percent, a sobering prospect in light of the recent jump in longer-dated bond yields already eating into bondholders’ capital returns. With average bond maturities worldwide now more than double the inflation-adjusted level of 2009, and three times that of 1994, Goldman says there's an elevated risk of losses if rates spike higher.

How It’s Relevant: With interest rates being held artificially low by central banks for so long, investors are buying bonds with longer maturities to get any sort of return. If interest rates go up, the yield (and the price) of these bonds will decrease. ASC 320 states that an investment is impaired if its fair value is less than amortized cost and requires investors to assess whether an other-than-temporary impairment (OTTI) exists. If it is more-likely-than-not that investors can hold the investment until recovery, then the impairment is considered temporary and an impairment loss is not recognized. However, depending on how fast and high interest rates rise, their assessment that they can “hold until recovery” may be harder to substantiate. If interest rates rise, companies with significant bond investments better brush up on impairment testing under ASC 320 and make sure they adequately document their assessments!

Sports Direct CFO Steps Down After Currency Swings Result in Revenue Loss (October 13, 2016) – WSJ CFO Journal (@CFOJournal)

A little over a month since its CEO stepped down, Sports Direct International PLC, a British-based sporting gear retailer, announced its CFO will also leave the company. Simultaneously, the company quoted “extreme movements” in the currency markets that caused them to cut their fiscal year 2017 results by £15 million ($18.3 million). The company also announced it would enter into a U.S. dollar/pound hedging arrangement, trying to prevent further losses.

How It’s Relevant: At the date of this post, £1 equals approximately $1.23. Compare this to $1.47 at the beginning of this year and $1.55 at January 1, 2015. In fact, earlier this month the British pound hit a 31-year low against the U.S. dollar. But the pound is not the only currency feeling the heat of the strong dollar. The Australian dollar, Canadian dollar, and euro have also weakened significantly against the U.S. dollar. Amid this currency volatility, accounting for foreign currency under ASC 830 has received renewed focus by auditors and regulators.

No worries. We’re here to help! We discuss the accounting for foreign currency in this post, as well as this post. In addition, we offer you foreign exchange training slides here.

SEC Announces Enforcement Results for FY 2016 (October 11, 2016) – U.S. Securities and Exchange Commission (@SEC_News)

During fiscal year 2016, the SEC filed enforcement actions reaching an all-time high. The 868 enforcement actions resulted in the SEC collecting more than $4 billion in disgorgement and penalties. There were 160 actions involving investment advisers or investment companies, and 21 actions involving violations of the Foreign Corrupt Practice Act (FCPA), new records for these categories.

It is noteworthy that the SEC is enhancing its use of data analytics to detect illegal conduct, including fraud, and using the data to ensure the cases won’t be lost in the courts. In addition to using data, the SEC relies on whistleblowers to report illegal conduct, and during fiscal year 2016, the SEC paid a record to $57 million to whistleblowers!

How It’s Relevant: The mission of the SEC is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation”. How do they adhere to their mission? A large part is through enforcement. The SEC is continually performing investigations to look into possible violations of laws and regulations, including fraudulent acts, violations of the FCPA, as well as other illegal conduct and acts that may not have investor’s best interests at heart. Companies would be wise to adhere to these laws and regulations so they don’t find themselves on the SEC’s “naughty list!”