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When accounting judgments may lead to legal liability

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1 year ago

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At first glance, accounting judgments may appropriately be viewed as routine accounting practices done in the normal course of business: estimates required due to business uncertainty, and assumptions necessary to complete financial reporting obligations. But when such judgments are overly optimistic, unsupported or poorly documented, they can tip into the territory of accounting errors or fraud, leading to restatements, public scrutiny and even regulatory enforcement. And in the current U.S. enforcement climate, the stakes remain as high as ever.

While the Securities and Exchange Commission has, under the new administration, indicated publicly that it may reduce its enforcement focus in areas of ESG and crypto disclosures, its scrutiny of accounting and auditing practices will remain robust. In 2024 alone, the SEC brought more than 45 enforcement actions involving financial misreporting. This pattern suggests that, even amid a broader shift toward deregulation, financial reporting integrity is still very much in the crosshairs, primarily due to concerns that inaccurate financial reporting erodes investor confidence and the market as a whole.

Given the significance of accounting estimates in financial reporting, it’s no surprise that many enforcement actions cite a registrant’s failure to appropriately consider all relevant facts and circumstances that could materially impact key assumptions that form the basis of accounting estimates, or intentionally ignore them. A prime example: In late 2024, United Parcel Service was fined $45 million by the SEC for materially misrepresenting its earnings. The company relied on an external valuation of one of its business units but withheld key information from the consultant. As a result, the unit was grossly overvalued, and UPS avoided recording a goodwill impairment. This case illustrates how selective disclosure, even without overt intent to deceive, can result in significant enforcement and reputational damage.

The judgment-fraud continuum

Management accounting judgments are not inherently problematic — after all, no standard can prescribe treatment for every unique transaction. But it’s when those judgments lack a sound basis, are inconsistently applied from one reporting period to the next, ignore contradictory evidence, or aren’t clearly documented that problems arise.

Case in point 1: Percentage of completion accounting

Consider revenue recognition in long-term contracts, a recurring hotspot in SEC enforcement. U.S. GAAP and IFRS both permit revenue to be recognized based on progress toward completion. This requires assumptions about future costs, contract modifications and the likelihood of contingent income. These assumptions should be reasonable and evidence-based — but our investigations often reveal overly optimistic revenue forecasts or misreporting of costs that can artificially boost profits.

A recent example relates to the AI-enabled robotic company Symbotic Inc., which reported errors related to its revenue recognition practices in 2024 due to material weaknesses in its internal controls that prematurely recognized expenses related to goods and services it was providing to customers under milestone achievements. In addition, the company failed to recognize cost overruns that could not be recovered and should have therefore been written off. Due to Symbotic recognizing revenue under a percentage of completion basis, the recognition of expenses prior to the satisfaction of key milestones resulted in the early recognition of revenue. Symbotic was sued for securities fraud in a class-action lawsuit, following a more than 35% decline in its share price and has announced an ongoing investigation by the SEC. 

This issue also crosses industries and geographies. U.K. oilfield services and engineering company Wood Group plc experienced an over 68% decrease in its share price since it announced in November 2024 that it had identified “inappropriate management pressure and override to maintain previously reported positions” leading to information being withheld from internal auditors. Reports have suggested the company engaged in over-optimistic accounting judgment and a lack of evidence to support assumptions made and positions taken.

Case in point 2: Straightforward accounting estimates

While fraud may be easier to conceal in complex areas of accounting, it can also manifest itself in more straightforward recurring practices. At the end of each reporting period, companies are required to estimate and record accruals for expenses that have been incurred but for which an invoice has not yet been received. Macy’s reported that a single employee had made unsupported or unjustified adjustments to the retailer’s accrual entries to conceal $151 million of small-package delivery expenses over a two-year period from Q4 2022 through Q3 2024. While the SEC has not announced a formal investigation, a securities class action was filed against the company, and the company announced it had initiated a $600,000-plus clawback in executive bonuses.

A company’s response: Getting ahead of the risk

The key takeaway? Judgment-related risks aren’t going away — and neither is regulatory scrutiny. U.S. enforcement bodies may be shifting their focus, but accounting misstatements remain a primary concern. And with the SEC’s emphasis on financial transparency and accurate reporting, businesses can no longer afford to treat accounting judgments as mere technicalities.

Key areas that a company can consider to address the risk of inaccurate or unsupported accounting estimates include:

  • Identify those accounting estimates that are most significant to the business from both a qualitative and quantitative perspective: what estimates and key assumptions have a) the most significant impact on reported results, and/or b) have the greatest element of uncertainty and, therefore, highest probability of being incorrect.
  • Understand the methodology for developing accounting estimates including the availability and reliability of data sources, how such sources are generated, whether there have been adjustments to how the data is compiled from period to period, and whether there are alternative or supplementary sources that can better inform the facts.
  • Stress-test the estimates by assessing the impact of applying alternative assumptions or weightings of information sources. Similarly, conduct regular retrospective testing of historical assumptions relative to actual results to identify how accurate prior estimates were, what factors or assumptions contributed to the accuracy and inaccuracy of prior estimates, and identify amendments and modifications to future estimation processes.
  • Ensure all significant judgments are clearly documented and evidence-based. Regulators and litigation plaintiffs use hindsight to “re-audit” or “recreate” accounting estimates so it’s critical that companies document a complete account of the information available to them at the time, and the assumptions, thoughts and alternatives that were considered when generating accounting estimates. Estimates project future events and will inevitably be incorrect. However, a well documented record that demonstrates the company made a balanced, thorough and good-faith approach to developing its estimates provides a strong mechanism to defend against any scrutiny that may be levied in the future.
  • Ensure that estimates, the processes followed and assumptions made are done in a clear and transparent manner with the company being open to the thoughts, ideas and comments from others within the business, including those outside the accounting function.

Ultimately, sound accounting judgment is not just a matter of technical compliance — it’s central to maintaining stakeholder trust and avoiding costly regulatory action.

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Accounting

Mandatory ESG Reporting Standards Demand Standardized Non-Financial Audit Trails

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1 hour ago

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September 5, 2026

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Mandatory ESG Reporting Standards Demand Standardized Non-Financial Audit Trails

Corporate accounting departments face an expanded regulatory mandate as mandatory sustainability and Environmental, Social, and Governance (ESG) reporting frameworks take full effect internationally. Governed by the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) IFRS S1 and S2 standards, enterprise financial controllers are now legally required to track, verify, and report non-financial data with the same internal controls and auditability as traditional financial statements.

The expansion shifts ESG compliance

This regulatory expansion shifts ESG compliance from marketing departments to corporate accounting offices. Financial managers are now responsible for gathering, consolidating, and verifying carbon emissions metrics, supply chain labor conditions, water usage, and climate risk exposures across multi-tiered corporate structures. These non-financial metrics must be integrated into standardized general ledgers to withstand rigorous third-party audit assurance processes.

To comply with these rigorous reporting mandates, accounting software providers have added dedicated ESG modules designed to aggregate data from IoT sensors, utility platforms, and vendor management systems. Controllers are implementing internal control frameworks—modeled after traditional COSO frameworks—to ensure the completeness, accuracy, and consistency of sustainability disclosures, protecting organizations against greenwashing penalties and litigation risks.

The transition requires significant cross-functional collaboration between accounting teams, legal counsel, and operational directors. Accounting professionals are expanding their technical expertise beyond financial ledgers to master carbon accounting methodologies, lifecycle assessment standards, and non-financial data governance protocols, fundamentally expanding the role of the modern corporate accountant.

Why This Information Matters
Mandatory ESG disclosures require companies to treat environmental and social metrics as audited financial records. Executives, accountants, and board members must institute formal tracking and assurance processes to satisfy legal mandates, maintain investor confidence, and mitigate regulatory non-compliance risks.

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Accounting

SEC’s Semiannual Reporting Proposal Faces Investor Pushback: What CFOs Need to Know

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2 weeks ago

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August 25, 2026

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U.S. Securities and Exchange Commission (SEC)

A proposal from the U.S. Securities and Exchange Commission to potentially shift some public companies away from quarterly financial reporting toward a semiannual model is drawing significant pushback from investors, even as it continues moving through the regulatory process. The debate has direct implications for corporate finance teams, auditors, and the broader transparency of U.S. capital markets.

What the SEC Proposed

According to a summary published by accounting advisory firm Cohen & Co., the SEC issued a proposed rule on May 19, 2026, aimed at simplifying financial reporting requirements for many U.S. public companies. The proposal would potentially reduce the frequency of certain mandatory disclosures from quarterly to semiannual, a structural change that has not been made to core U.S. reporting requirements in decades.

The proposal follows an extended debate within U.S. policy circles, with proponents arguing that reduced reporting frequency could lower compliance costs and free up management time for longer-term strategic planning rather than quarter-to-quarter results management.

Why Investors Are Pushing Back

Comment letters submitted in response to the proposal have been extensive, and according to Cohen & Co.’s review of the public record, investors “appear to be largely opposed” to the shift, viewing frequent interim reporting as a core benefit of U.S. capital markets relative to other jurisdictions.

Accounting and law firms have taken a more measured position, generally urging any changes to remain aligned with the Financial Accounting Standards Board (FASB), whose existing disclosure requirements and guidance are built around a quarterly reporting cadence. A shift to semiannual reporting without corresponding changes to FASB guidance could create friction between SEC filing requirements and GAAP-based disclosure expectations.

Lessons From the U.K. Experience

The debate is not without precedent. The United Kingdom moved away from mandatory quarterly reporting for listed companies in 2014, returning to a semiannual disclosure requirement. According to Cohen & Co.’s analysis, that experience offers a cautionary data point: there was no measurable increase in capital expenditure or R&D investment following the change, while analyst coverage of affected companies declined as reliable interim information became less available — a particular risk for smaller and newly public companies that rely on analyst coverage to maintain investor visibility.

Practical Implications for Finance Teams

Beyond the debate over disclosure philosophy, the proposal carries practical complications. Many companies have debt covenants and credit agreements structured around quarterly financial delivery; a shift to semiannual reporting could require renegotiating those terms. Reduced reporting frequency would also extend the “window of market silence” between disclosures, a factor that governance and investor-relations teams would need to manage carefully to avoid information asymmetry.

Separately, and unrelated to the reporting-frequency debate, the SEC and FASB have continued finalizing more routine updates this year. New Accounting Standards Updates are taking effect for December 31, 2026, fiscal year-ends covering income tax disclosures, credit loss measurement, induced debt conversions, and stock compensation, according to Eide Bailly’s review of 2026 ASU activity. Additional guidance on paid-in-kind dividends and environmental credits is also on the near-term horizon.

What to Watch Next

The semiannual reporting proposal remains in the comment and review phase, and no final rule has been adopted as of this writing. Finance leaders should monitor the SEC’s regulatory agenda for further movement, while treating the current quarterly reporting requirement as the operative standard until any final rule is issued and an effective date is set.

Given the extent of investor opposition documented in the comment file, a full shift to mandatory semiannual reporting appears more likely to result in either a scaled-back compromise or continued study rather than swift adoption — though the SEC’s ultimate direction remains uncertain.

 

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Accounting

AI-Driven Automation and Continuous Accounting Frameworks

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3 weeks ago

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August 15, 2026

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The accounting profession is undergoing a fundamental structural transition as enterprise finance departments shift from periodic month-end closes toward automated continuous accounting models. By integrating specialized machine learning algorithms directly into enterprise resource planning (ERP) platforms, chief accounting officers are transforming financial reporting from a retrospective exercise into a real-time operational asset.

The Shift from Periodic Close to Continuous Financial Reporting
Traditional accounting workflows heavily relied on manual data reconciliation, spreadsheet calculations, and multi-week closing cycles at the end of each fiscal period. In contrast, continuous accounting frameworks utilize automated software agents to process, validate, and post transactional data in real time as business activities occur.

Automated bank reconciliation tools cross-reference incoming bank feeds, invoice records, and purchase orders automatically. By resolving transactional variances instantly throughout the month, corporate accounting teams eliminate the traditional workload spikes associated with quarterly and annual closes.

Machine Learning in Audit Trails and Anomaly Detection
Advanced natural language processing (NLP) and machine learning tools are redefining internal audit and financial control environments. Automated systems analyze 100% of general ledger entries, identifying anomalous transactions, duplicate payments, and unauthorized journal entries in real time.

Rather than relying on random statistical sampling, corporate internal auditors can focus their attention on high-risk flags automatically surfaced by algorithmic monitoring platforms. This continuous risk assessment strengthens internal controls over financial reporting (ICFR) and significantly reduces fraud risk.

Evolving Roles for Accounting Professionals
As routine data entry and manual reconciliation tasks become fully automated, the skill set required for accounting professionals is shifting toward data analysis, system design, and strategic business advisory.
– Systems Governance: Accountants are increasingly responsible for monitoring algorithmic accuracy and managing data integration pipelines.
– Business Partnership: Finance professionals leverage real-time financial dashboards to advise operational leaders on margin management and working capital allocation.
– Regulatory Compliance Management: Accounting teams utilize automated platforms to ensure compliance with dynamic tax codes and international accounting standards.

Core Implementation Recommendations
1. Deploy Automated Reconciliation Tools: Integrate continuous transaction processing modules into existing enterprise ERP architectures.
2. Establish Algorithmic Governance Controls: Implement strict internal testing protocols to ensure automated accounting rules comply with GAAP/IFRS standards.
3. Reskill Accounting Teams: Invest in training finance staff on data analytics, workflow automation, and predictive financial modeling.

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