Trying to identify red flags or trends in a company’s financial statements and public disclosures is a monumental task. The lengthy, and often opaque, nature of financial reporting makes the process of trying to thoroughly screen a company’s disclosures, or track specific events, time-consuming and tedious. Audit Analytics’ Accounting Quality + Risk Matrix (AQRM) allows users to easily identify indicators of earnings management or issues with accounting quality.
AQRM is an interactive tool designed to quickly identify and understand qualitative and contextual metrics of governance and reporting quality. Red flags and events highlighted in the risk matrix can be used for screening, idea generation, portfolio monitoring, and risk management for every SEC registrant.
With AQRM, all of the critical information for a company’s common metrics and reportable events over the last five years are located in one place — making it possible to easily isolate areas of performance, as well as track and benchmark metrics and risks for due diligence, risk monitoring, and business prospecting.
Using a proprietary analysis, notable, significant, and critical events or anomalies are clearly highlighted for each company. As can be seen in the table of the top ten large accelerated filers with the most flags since 2015, AQRM makes it easy to identify areas that may be of particular interest for specific companies. Considering AQRM is a five-year snapshot, it also makes it easy to pinpoint areas where a company may be struggling year-over-year.
For example, TerraForm Power, Inc. [TERP] has had unremediated control weaknesses since its annual report was filed on December 5, 2016. While some control weaknesses, such as those related to implementing information technology systems, can take years to resolve, unremediated accounting-related issues occurring in every quarter for four years in a row are a signal there could be other issues within a company.
The matrix provides a quick and useful snapshot, while also providing the option to access in-depth information on each event in order to determine the circumstances surrounding the flagged metric. As of November 2019, AQRM includes the following metrics:
Auditors
- Votes Against Auditor Ratification
- Audit Opinion – Going Concern Opinion
- Audit Opinion – Change in Engagement Partner
- Auditor Change
- Audit Fees
– Significant changes in fees between years
– Significant non-audit fees
– Outlier compared to peers
Financial Reporting
- Out of Period Adjustment
- Impairments
- Change in Accounting Estimates
- Financial Restatement
- Accounting Disclosure Complexity
- Deviation from Benford’s Law
- Beneish M-Score
- Altman Z-Score
Controls
- Internal Control Issues
- Disclosure Control Issues
- Late Filings
Stakeholders
- Shareholder Activism
- Litigation – Regulatory
- Litigation – Civil Rights
- Litigation – Employment and Labor
- Litigation – Environmental
- Litigation – Intellectual Property
- Litigation – Corruption and Illegal Activities
- Litigation – Shareholder Actions
Insiders
- CEO Change
- CFO Change
This analysis was created using the AQRM powered by Audit Analytics. AQRM is available as an online subscription and through data feeds.
For more information on AQRM, or for subscription information, please contact us.