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Marketplace Trends

Today’s capital markets demand reliable and valid financial information, but the current vehicles of exchange for private company data do not meet this need. Without a way to confirm the source and authenticity of audit reports and financial statements, third-party users that rely on this information for lending and investing decisions cannot feel confident in the information they receive. The occurrence of fraud has only further increased the focus on the accuracy of information.

The format and distribution channels frequently used by CPA firms and private businesses for exchanging information are often both inefficient and unsecure. Documents exchanged through mail, hand delivery and email are at risk of being altered. As a result, users are unable to confirm the legitimacy of the information they receive and are increasingly demanding accurate, source-driven and verified financial information.

There are three key marketplace trends causing this demand, including:

Demand for Authenticated Information

Digital Transformation of Financial Services

Compliance for Private Companies

 

 

 

Demand for Authenticated Information

The demand for validated sources of information stems from the occurrence of fraud in financial document exchange. The advancement of technology has made it easier to electronically alter information, giving private companies the opportunity to make changes for their financial gain. PDFs and other editable documents that are used to share information can be easily copied or manipulated.

Due to credibility concerns, banks and other third parties are turning to information they are receiving from tax returns from the IRS to make lending decisions although better information is available through the audited financial statements.

There are a few different ways fraudulent private company audit reports and financial statements are being produced:

  1. Management produces fictitious audit report and financial statements using an existing CPA firms’ letterhead and report language.
  2. Management alters information in a CPA firm-audited financial statement.
  3. Management creates a fictitious accounting firm or uses a firm that is not properly licensed.

 

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"The CPA issues the report on the financial statements that he audited, not the one the client prepared yesterday. Then those go to the bank and the bank thinks those are the original audit."

- Robert R. Harris, CPA/CFF, FCPA, CGMA
Forensic Accounting Expert
Former AICPA Chairman

 

 

Digital Transformation of Financial Services

The transformation from manual, paper-based processes to electronic data has impacted many financial services areas, from accounting services, banking and wealth management, to payments and more. Cloud-based platforms have provided new ways to manage financial data, and brought real-time access to information.

Although the digitization of documents has increased the ease and speed of accessing information, the lack of controls has created more uncertainty about the source and integrity of the data. The vehicles of exchange and communication surrounding this information need to be more sophisticated to address these challenges.

In addition, with technology advancements occurring at a rapid pace, it’s essential to be prepared to adapt to those changes. With more data available today than ever before, practitioners can build deeper connections with clients and help them interpret data to proactively identify issues and opportunities.

 

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Compliance for Private Companies

The regulatory and compliance environment has become far more complex for private businesses, their lenders and investors, and CPA firms servicing them.

One example is the Dodd-Frank Custody Rule, which requires private equity firms with more than $150 million under management to follow SEC independence rules. These SEC independence rules prohibit a CPA from assisting in the preparation of a client’s financial statements. This can create numerous concerns and challenges for firms servicing these clients, including:

  • Having an unprotected/unencrypted Auditor Report document “floating” around once they issue to the client
  • Firms lack a way to confirm that their Auditor Report has been combined with (and only with) the correct set of financial statements after issuing to the client
  • Reliance on clients to send firms a final copy of the combined CPA firm’s audit report and financial statements before distributing to 3rd parties

 

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"The number and size and impact ability of regulation of smaller businesses is getting bigger and bigger and bigger. Without having the proper grounded financial information, they won’t be properly covered."

- Rick Richardson