Financial executives are under pressure to meet financial targets to impress investors with their business performances. The regulator is engaged in scrutinizing the financial records of companies to know whether finance chiefs are manipulating the numbers to overcome profit squeezes.
In today’s news, over 99% of the companies in the S&P 500 have reported a drop of 4.65% in Q4 earnings. Several companies reported a fall in profits and reduced their guidance for the future. It is the first YoY decline since the onset of the pandemic in 2020.
Hides deteriorating finances to show higher performance
Finance executives use revenue recognition or amounts earmarked for losses to improve the earnings of shares in tough economic times. It is legal. However, it could lead to violations of security laws or even fraud in some cases. Some accounting tactics used by the executives include hiding the deteriorating finances of the company to show improved performance. It falls outside the purview of accepted accounting norms.
Impressive activities for earnings guidance
R.G. Associates Inc.’s owner, Jack Ciesielski, said the companies offer incentives to executives for cleverly boosting earnings in tough economic times. The US SEC has become alert in the recent period and identified several cases in which executives were manipulating the numbers to meet Wall Street estimates or in their proximity to enthuse the investors. The executives also include impressive activities in the report for higher earnings guidance in the future.
EPS initiative to root out manipulation of earnings
A data-driven analytics initiative also called the EPS initiative, is implemented by the US SEC to unearth the manipulation of earnings by companies. This armory of the SEC helped unearth financial irregularities at six companies and register cases against them. The teams engaged in financial manipulations at these companies included former Chief Financial Officers, present CFOs, and others.
In the EPS cases, the SEC has put a focus on individuals who are engaged in manipulating accounts to bring about a change in corporate culture. It discourages executives from engaging in fraudulent activities to inflate the results. Even minor tweaking of the figures could land the executives in trouble and attract lawsuits.
SEC fined $4 million on Gentex Corp
In February, the SEC imposed a $4 million fine on Gentex Corp., a supplier of automotive parts based in Michigan, for adding a penny to its EPS using its fraudulent earnings management tactics. According to the most recent BNN breaking news, the finance chief of Gentex, Kevin Nash, has reduced the company’s reserves from $300,000, which are earmarked for paying bonuses to its employees, to $100,000. It helped the company meet earnings per share of 27 cents. The SEC gathered this information from an internal email in which Kevin mentioned reducing the reserves to maintain 0.27 per share.
Mr. Kevin said it was a good intention by the SEC without admitting fault. In February, he agreed to remit $75,000 to the SEC to resolve the charges. According to a spokesman for Gentex, the company will continue to place its confidence in Mr. Kevin, who will be part of the management team. He went on to say that accounting entries do not have any material impact on its financial statements.