Tyco International Ltd. announced that the Securities and Exchange Commission is investigating the company’s books. Securities lawyers say actions such as this underscores how serious regulators are about cleaning up companies' accounting practices.
Management of earnings and revenues with specific reference to the acquisition arena is under scrutiny by the SEC. Tyco, with more than 100 acquisitions under its belt in the past seven years, has drawn the SEC’s attention. Acquisitions present a ripe opportunity for companies to “cook the books.”
The SEC recently issued a bulletin on revenue recognition (read the article) and SEC Chairman Arthur Levitt personally has vowed to “clean up the financial reporting process out of concerns that companies are toying with their books in order to meet earnings projections.”
The theory behind the current flurry of activity is that companies have been abusing this area of accounting for years. The SEC did not comment on what sets off red flags when investigators are examining acquisitions or other accounting issues.
These investigations are handled in two ways. An informal inquiry like the one in the Tyco case means that regulators are looking for information voluntarily to be produced. A formal investigation, however, means commission staffers wield the power of a subpoena.