Forensic and Litigation Consulting Insights - Summer 2013
Bulletproof Your Accounting Judgments With Documentation
It has been beaten into our heads as accountants… document, document, document. This is easy to remember when you are dealing with an unfamiliar type of transaction or a new accounting standard because you have to figure out what you are doing at the front end and since the auditors will be testing your determination.
However, documentation diligence can lapse for ongoing judgments for contingencies like bad debt and litigation. In the moment, company decision makers become comfortable with the facts and analyses behind critical judgments, and those involved become satisfied that the accounting determination is solid. In the flurry of the end-of period activity and with the relief of the hard judgments made, there can be a tendency for the documentation of these critical judgments to wait. Unfortunately, the clarity of the support for the judgment fades with time, and the absence of contemporaneous supporting documentation provides leverage for regulators and others to question the prudence of past judgments. Although documentation will not completely shield you from regulators, it can provide powerful evidence of your deliberation and may head off allegations of bad intent.
Section 13 of the Securities Exchange Act of 1934 requires companies to maintain “books and records” and frequently is cited by the U.S. Securities and Exchange Commission in its enforcement actions. Section 13 (b)(2)(A) requires reporting companies to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The following case examples highlight the importance of documenting your judgments to steer clear of books and records violations.