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The SEC’s Renewed Focus on Accounting Fraud

By Douglas M. Boyle, James F. Boyle, and Brian W. Carpenter

With a goal to mitigate regulatory oversight, the SEC has unveiled a revolutionary tool known as the accounting quality model (AQM).  The University of Scranton’s Accounting Faculty members and researchers Douglas M. Boyle, James F. Boyle, and Brian W. Carpenter dive deep into the AQM, exploring the methods in which it will identify potential fraud by management and increase accountability for companies nationwide. The AQM will leverage XBRL tagged data to identify irregularities as well as increase transparency within financial reporting. With the recent call for accounting practices to become more transparent, the need for qualified accountant with skills acquired in traditional and online masters in accounting has become prevalent.

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The SEC’s introduction of a state-of-the-art accounting quality model (AQM) has initiated a new era for the detection of accounting fraud and improper disclosures. Craig M. Lewis, the director and chief economist of the SEC’s Division of Economic and Risk Analysis, described the AQM as a robust tool capable of providing quantitative analytics across the SEC in order to assess and identify anomalies in the financial statements of a registered company (“Risk Modeling at the SEC: The Accounting Quality Model,” speech on Dec. 13, 2012, to the Financial Executives International Committee on Finance and Information Technology, http://www.sec.gov/News/Speech/Detail/Speech/1365171491988).

Some have coined the term “Robocop” for the AQM. One Financial Times article noted that this early warning system “is one of the boldest uses so far of the computer-readable ‘XBRL [Extensible Business Reporting Language] tags’ and is expected to be rolled out this year” (Adam Jones, “SEC to Roll Out ‘Robocop’ Against Fraud,” Feb. 13, 2013).

XBRL tags are used to identify financial data included in typical long-form financial statements and related note disclosures. The SEC initiated a program phasing in the required use of XBRL tagged data in 2009 (SEC Release 33-9002,“Interactive Data to Improve Financial Reporting”). The use of XBRL tags enhances access to and analysis of financial data by investors, analysts, journalists, and SEC staff. In the case of the SEC’s AQM, these XBRL tags provide the foundation for a renewed, high-tech emphasis on the detection of fraud and other accounting irregularities. Computerized analysis of this tagged information significantly improves the efficiency and speed of the examinations of filed data.

One recent article highlighted these capabilities of the AQM, noting that the model “is a fully automated system that effectively takes a firm’s filing the day it comes in, processes it, and then keeps it in the database so that somebody who is interested in looking at a report on that company would be able to do so within 24 hours of the filing being posted on EDGAR [Electronic Data-Gathering, Analysis, and Retrieval system]” (“Q&A with an Expert: The SEC is Developing Tools That Use XBRL Data to Discover Accounting Anomalies and Improve Financial Disclosure,” Dimensions: The Compliance Authority, Apr. 2013, p. 3).

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Reprinted from Management Accounting Quarterly, July 2014, copyright 2014, with permission from The Association of Accountants and Financial Professionals in Business.