What the SEC Examines During Financial Reviews

Here are the broad areas of corporate financial reporting that the Securities and Exchange Commission says it is targeting in reviews:

* Revenue recognition. The agency calls this the No. 1 problem it has found in reviews of financial reports. Among the accounting abuses the SEC has uncovered is “round-tripping,” meaning double-counting of transactions between affiliated companies. For example, a parent company sells computer systems to a subsidiary and records the sale as revenue and the new system as an asset.

* Quality of earnings. Some companies have opted to improve their balance sheets “by simply changing accounting methodology and not disclosing it,” the SEC said. For example, an asset that is being depreciated over five years can “miraculously” boost earnings if it suddenly is depreciated over 10 years instead, the agency noted.

* Acquisitions. The SEC says it is concerned about reporting at companies that have bought others and reported a big boost in financial results. It may be misleading if the “acquiring company looks great, but the earnings are all in the subsidiary,” the agency said.

* Netting. Companies may run afoul of accounting rules if one-time gains are improperly netted against operating expenses, making operating earnings appear better than they really are, the SEC said.