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The Reinvigorated Regulatory Agency, The SEC Takes Action on Improper Revenue Recognition

The new revenue recognition rules are daunting and many companies wonder how they will be impacted by ASC 606.  What really happens to companies if they don’t comply with the new revenue recognition rules? Who enforces these rules? The reinvigorated regulatory agency, the SEC takes action on improper revenue recognition accounting. Learn about the SEC’s role in revenue recognition and how to avoid improper revenue accounting.

Ever wonder about the repercussions of not complying with the new revenue recognition standard? 

Numerous consequences and risks are associated when businesses fail to comply with the new ASC 606 revenue recognition rules.  In fact, the US Securities and Exchange Commission (SEC) is responsible for ensuring that companies comply with the new revenue recognition standards.

After the 2008 financial crisis, much of the SEC’s attention was devoted to managing high-profile cases against major banks and mortgage lenders accused of contributing to the subprime mortgage bubble. That in turn left little bandwidth for day-to-day enforcement, particularly of smaller businesses.

In 2013, the SEC released a new enforcement strategy, which includes both major and minor infractions for companies not comply with standards.  The strategy includes areas like internal controls, which were previously overlooked in SEC actions. This has been reflected in the Commission’s activities over the past 18 months, particularly in the software sector.  There are indications that the organization is making up for lost time with a new, aggressive enforcement strategy. SEC Chair, Mary Jo White explained in a widely quoted 2013 speech:

“One of our goals is to see that the SEC’s enforcement program is – and is perceived to be – everywhere, pursuing all types of violations of our federal securities laws, big and small.  […] Investors in our markets want to know that there is a strong cop on the beat – not just someone sitting in the station house waiting for a call, but patrolling the streets and checking on things.”

The SEC is set to take the new ASC 606 regulations very seriously and is setting an aggressive enforcement strategy that pays as much attention to minor infractions as major malfeasance. The SEC has sent a clear warning that it will turn its attention to the enforcement of sound financial practice. Already, activity is on the uptick, and SEC senior representatives make it clear that this trend will continue.

There has been a sharp increase in SEC enforcement actions around financial reporting, with a particular focus on revenue recognition issues. Andrew Ceresny, the SEC’s Enforcement Director, has warned companies that they can continue to expect “a lot of activity” in this area in the years ahead, calling it “the next frontier” for enforcement.

For many American businesses, the combination of new standards and a reinvigorated regulatory agency has the makings of a “perfect storm”, particularly once the updated guidance comes into effect.

To avoid risks and comply with ASC 606 learn more about the challenges with ASC 606 by subscribing to our blog.

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