The US Securities and Exchange Commission (SEC) has developed a computerised diagnostic tool to spot early warnings of suspicious accounting practices.
The tool, working on the SEC’s Accounting Quality Model (AQM), will monitor official filings such as annual reports, which are posted by publicly traded companies on a regular basis.
The model is intended to provide quantitative analytics to identify anomalies within financial statements, and the degree to which such statements deviate from the norm.
SEC chief economist and Risk, Strategy, and Financial Innovation (RSFI) division director Craig Lewis said it would identify firms which "stick out from the pack", which would allow the SEC to evaluate the riskiness of a business, as well as identifying signs of "earnings management", or potentially fraudulent practices.
The system will be facilitated by the introduction of the XBRL tagging system, now mandatory for listed companies using US GAAP rules. XBRL enables easier comparison of financial statements from different businesses and periods by highlighting comparable items such as revenue or pre-tax profit.
Lewis said the tool would be ready in about nine months, although it may appear sooner.
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