Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p32
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 32/41)
Character Range: 101025–104399

analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages.

      * Need to obtain additional debt or equity financing to stay competitive—including financing of major research and development or capital expenditures.

      * Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements.

      * Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business combinations or contract awards.

Information available indicates that the personal financial situation of management or those charged with governance is threatened by the entity's financial performance arising from the following:

      * Significant financial interests in the entity.

      * Significant portions of their compensation (for example, bonuses, share options, and earn‑out arrangements) being contingent upon achieving aggressive targets for share price, operating results, financial position, or cash flow.[31]

      * Personal guarantees of debts of the entity.

There is excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals.

Opportunities

The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

      * Significant related‑party transactions not in the ordinary course of business or with related entities not audited or audited by another firm.

      * A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or non‑arm's‑length transactions.

      * Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgements or uncertainties that are difficult to corroborate.

      * Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult "substance over form" questions.

      * Significant operations located or conducted across international borders in jurisdictions where differing business environments and cultures exist.

      * Use of business intermediaries for which there appears to be no clear business justification.

      * Significant bank accounts or subsidiary or branch operations in
        tax‑haven jurisdictions for which there appears to be no clear business justification.

The monitoring of management is not effective as a result of the following:

      * Domination of management by a single person or small group (in a non owner‑managed business) without compensating controls.

      * Oversight by those charged with governance over the financial reporting process and internal control is not effective.

There is a complex or unstable organisational structure, as evidenced by the following:

      * Difficulty in determining the organisation or individuals that have a controlling interest in the entity.

      * Overly complex organisational structure involving unusual