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5 Reasons Financial Reporting Problems Persist in the Mortgage Industry

checklistThe U.S. Securities and Exchange Commission (SEC) is cracking down on those involved directly with the financial reporting processes, which is causing a number of issues in the mortgage industry.

Andrew Ceresney, Director, Division of Enforcement recently spoke at the SEC's Directors Forum 2016 Keynote Address to highlight the importance of financial reporting misconduct and how the government agency plans to address this problem moving forward.

"The importance of aggressively pursuing financial reporting deficiencies cannot be overstated.  Comprehensive, accurate, and reliable financial reporting is the bedrock upon which our markets are based," Ceresney stated. "Materially false or incomplete financial reporting saps investor confidence and erodes the integrity of our markets.  The Commission is committed to holding accountable those whose actions prevent investors from receiving timely and reliable information that enables them to make informed investment decisions."

Ceresney identified 5 causes of today’s financial reporting problems, which include: 

  1. Significant pressure to meet earnings and other performance expectations;
  2. Excessive focus on short term performance rather than longer term success;
  3. Poor oversight in units and subsidiaries;
  4. Growth outpacing the reporting and accounting infrastructure; and
  5. Management’s over-reliance on processes and poor “tone at the top.”

The SEC also pointed out some popular areas of wrongdoings among those that work closely with financial reporting including revenue recognition, valuation and impairment issues, earnings management, missing or insufficient disclosures, internal accounting controls, and clawbacks of bonuses and incentive-based compensation.

Ceresney pointed to "gatekeepers," or audit committee members and external auditors, in the financial reporting area for being the ruling hands during this process.  "Gatekeepers are critical to helping ensure that issuers make timely, comprehensive, and accurate disclosure," he said.

"Our markets depend on comprehensive and accurate disclosure to investors.  As the Commission’s actions in this space over the past several years show, companies and their executives will face enforcement action if they mislead investors," Ceresney concluded. "We hope this aggressive posture will deter misconduct and ensure that companies report accurate and reliable financial information."

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