Corporate Finance

SEC Official Urges Closer Look at Cash Flow Statements

The call is motivated by a steep rise in the percentage of financial restatements attributable to cash-flow errors.
Matthew HellerDecember 23, 2014
SEC Official Urges Closer Look at Cash Flow Statements

Citing an increase in restatements due to errors in the statement of cash flows, a Securities and Exchange Commission official has suggested that companies take a fresh look at how they prepare and review the statement, Compliance Week reports.

sec logoIn 2009, only 65 restatements (8.7% of the total) could be attributed to errors in the cash flow statement, according to data from Audit Analytics. But while the number of restatement has held steady over the past five years, cash flow restatements totaled 174 in 2013 — more than 20% of all restatements.

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Kirk Crews, a professional accounting fellow at the SEC, said in a speech that SEC staff had studied cash flow restatements and noticed the “majority of the errors were due to relatively less complex applications of GAAP, such as failure to appropriately account for capital expenditures purchased on credit.”

The SEC does not have enough information to perform a thorough analysis, Crews told the annual national conference of the American Institute of Certified Public Accountants. But he said it would be appropriate for companies “to consider and evaluate the existing controls around the preparation and review of the statement of cash flows.”

He added, “Given the increasing nature of misstatements, this should likely include risk assessment and monitoring controls in addition to control activity level controls.”

He also suggested that companies take a closer look at whether corporate accounting staff understand the principles in Accounting Standards Codification Topic 230, Statement of Cash Flows.

“Are there ways you can provide them with better training to perform their job?” Crews asked. “Do those individuals reviewing the statement of cash flows have enough expertise to identify and prevent misstatements in their review process?”

Charles Mulford, director of the Financial Analysis Lab at Georgia Institute of Technology, told Compliance Week that the steady increase in cash flow restatements represents a slow awakening to the importance of cash flow presentation to investors, coupled with scant guidance in accounting standards on how to classify cash flows as arising from either operating, investing or financing activities.

“With limited classification guidance, classification is left open to management judgment,” he explained. “You’ve got lots of different people interpreting what they think the rules mean.”