Date01 November 2015
Published date01 November 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22110
Donald A. Walker Jr.
On June 5, 2015, the
Securities and Exchange
Commission (SEC) published
Accounting and Auditing
Enforcement Release (AAER)
No. 3662. The release described
the Commission’s findings in
the case of Computer Sciences
Corporation (CSC) and several
of its top executives includ-
ing its former chief executive
officer, chief financial officer,
and four other top executives.
The case involved financial
reporting and disclosure fraud
charges dating from 2009 to
2011. TheSEC charged that
during that period, CSC mate-
rially overstated its earnings
and did not adequately disclose
significant problems with its
largest contract relationship.
One significant issue was
the use and development
of improper and inaccurate
accounting models used to
calculate revenues to be rec-
ognized on CSC’s largest con-
tract. The SEC charged that
models used several unsup-
portable assumptions about
the applicable provisions of the
contract, substituting assumed
future contract provisions and
changes to the contract, includ-
ing those that the customer had
specifically rejected, as well
as changes that had not been
negotiated yet, and effectively
used wishful thinking account-
ing to obtain financial results
that would meet earnings
The SEC also charged that
the company omitted disclo-
sures of problems with meeting
contract delivery and timing
terms; that periodic reports not
only omitted disclosures, but
top executives publicly denied
that there were problems with
the contract when they knew
of problems and of the use of
known improper models.
The SEC charged failure
to impress the company and its
employees with an honest and
proper “tone at the top” when
top executives were encourag-
ing and implementing improper
accounting and reporting.
There is, however, a message
forhonest, hardworking execu-
tives that goes beyond “don’t
cook the books.”
The SEC has now brought
two significant enforcement
cases involving the use of mod-
els that impact the calculation
of revenues and profits. In a
previous case, Capital One
Financial Corporation, AAER
No. 3456, dated April 24, 2013,
the SEC charged the company
and two officers with overstat-
ing income by understating
loan loss estimates developed
using loss modeling. In the
CSC case, the company and
officers were charged with
deliberately designing models
that produced a target result by
both improper calculation and
by using inaccurate and
insupportable inputs.
From the two cases just
cited, accounting and finance
executives should at least
consider the following points:
• Models should be carefully
designed and back‐tested
against history to assure
accuracy and integrity when
they materially impact the
financial statements.
• Controls should be
developed, carefully
documented, and
testedwhen used, by
officers independent of
the financial reporting
• Controls should be devel-
oped and maintained over
the logic and changes
thereto assure fidelity to the
provisions being modeled.

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