Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of relevant and timely accounting news relevant to CPAs? We do! Here are a few articles, blog posts, and publications designed to help increase business acumen in the profession.

CFOs See Earnings Shenanigans in 20 Percent of U.S. Public Firms (September 24, 2015) – Reuters (@Reuters)

A recent survey shows that nearly 400 top finance executives believe earnings misrepresentation is a widespread issue. This group believes at any point in time 20 percent of public firms and 30 percent of private firms publish intentionally misleading earnings information, even though the accounting complies with generally accepted standards. Further, the survey reveals that, of the companies distorting their earnings numbers, two out of three overstate theses measures while the remainder understates. These chief officers also noted that neither enforcement actions (by the SEC or other regulators) nor corporate oversight (by the audit committee) are strong safeguards against this kind of misrepresentation.

How It’s Relevant: Proper revenue recognition and presentation is critical when judging the financial soundness of a company. If investors cannot trust the numbers shown in publicly available information, a huge problem exists when assessing a company’s fiscal strength or growth prospects! This belief in widespread earnings manipulation also gives more weight to the idea that the risk of fraud is significant for revenue recognition. Make sure you adequately understand and respond to significant earnings risks!

Marvell Stock Plummets after Accounting Firm PwC Resigns (October 27, 2015) – Accounting Today (@AccountingToday)

After launching an internal investigation to determine whether revenue was recognized earlier than allowed under generally accepted accounting principles, Marvell Technology Group Inc. lost its relationship with external accounting form PwC. The company’s audit committee began the investigation into revenue recognition to determine whether 7 to 8 percent of revenue recorded in the second quarter of 2015 should have been recorded in the third quarter. On its way out the door, PwC questioned Marvell’s tone at the top, citing it may be ineffective for exercising appropriate internal controls, and also called for further examination of the company’s process for litigation reserves, royalty expenses and financial reporting. As the news broke, Marvell’s stock price continued its plunge and is now trading down 35 percent for the year.

How It’s Relevant: The main takeaway here is that a company should never get to the point that your audit firm feels so strongly about the inadequacy of senior management that it needs to resign! Or else! This article points out real life consequences of poor accounting choices, which can erode shareholder value and leave a big black eye on the company’s reputation. It also reminds us of some important places where we should focus our audit attention: judgmental areas such as revenue recognition, contingent liabilities, and financial reporting decisions.

Second IBM Probe Reveals Accounting Perils of Services Business (October 28, 2015) – Accounting Today (@AccountingToday)

The SEC launched a new probe into IBM’s accounting practices, focusing on the treatment of certain revenue transactions in the United States, United Kingdom and Ireland. As IBM moves into emerging technologies focused on cloud computing and data analytics, it must make difficult choices when classifying products as sales of licenses or subscriptions versus services. The former allows revenue to be booked immediately while the latter requires revenue to be recognized when the services are delivered. Under 14 straight quarters of shrinking sales, IBM management may be under pressure to find ways to make product sales look better by lumping more sales into licensing or subscription arrangements.

How It’s Relevant: Revenue recognition again comes to the forefront of potential regulatory action by the SEC against a large, multinational company. If big companies are struggling with these accounting choices, how well are smaller companies handling the same issues? Again, judgment in revenue recognition is a high-risk area that should be considered carefully!

Real Estate Execs and Accountants Charged with Improper Accounting (October 27, 2015) – Accounting Today (@AccountingToday)

The fallout from the financial crisis continues as executives at the real estate firm, St. Joe Company, were charged by the SEC with financial misconduct. Specifically, management did not properly reflect the declining value of residential real estate developments during the crisis, which led to materially overstated earnings and assets for its 2009 and 2010 fiscal years. The company failed to take write-downs that would have been necessary with proper impairment testing and a functioning internal control process. St. Joe will pay $2.75 million as a civil penalty to the SEC and the five executives associated with the scandal will collectively pay $975,000.

How It’s Relevant: There is nothing fine about bad accounting, unless you think about civil fines and settlements! This article serves as a prime example of the potential liabilities to the company AND individuals to pay the price when poor financial reporting decisions are made. The millions of dollars quoted don’t even include the amount of money that investors lost as a result of materially misstated financial statements. Be alert to the areas where management judgment creeps into financial presentation and respond to those risks effectively.

SEC Readies Clawback Rules for Punishing Bad Accounting (October 12, 2015) – Wall Street Journal (@WSJ)

As a response to evidence of accounting mismanagement, the SEC is on the cusp of issuing new rules to claw back executive compensation when material errors are found in the company’s books or financial statements. Currently, a large majority of S&P companies (approximately 90%) have voluntary claw back provisions subject to board discretion when deciding how to punish executives involved with financial misrepresentation. The new SEC rules would require punishment from a wider range of top executives, which many companies oppose since officers not involved with a hypothetical accounting scandal may have no knowledge of the issues.

How It’s Relevant: After sitting on the sideline watching public companies self-regulate violations of accounting standards by clawing back executive pay, the SEC is ready to get in the game! The new rules hope to have a dampening effect on executives making aggressive accounting decisions to boost profitability or financial condition at the expense of crossing the lines drawn by generally accepted accounting principles. Keep an eye on how company policy may adjust to respond to these more onerous rules.