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Measuring the Risk of Accounting Irregularities

February 17, 2010

Two services are using new technology to assess the likelihood of accounting irregularities at companies and the impact of negative news stories on corporate reputations.

One of them, from Audit Integrity, assigns Accounting and Governance Risk, or AGR, ratings to particular companies and industries. Audit Integrity uses publicly available accounting and governance data to assess the transparency and reliability of a company’s financial reporting and corporate governance practices. The firm recently received validation in an academic study that found its ratings system outperforms academic risk measures such as working capital accruals in head-to-head tests for detecting and predicting Securities and Exchange Commission enforcement actions, substantial accounting restatements, and shareholder lawsuits.

Another company, Media Tenor International, uses a different measurement called a Financial Sentiment Tracker to keep tabs on how various companies and industries are being covered in the media and in financial analyst reports, and the effect on their stock prices. Companies can use such information for reputation management, while financial firms are also using it to anticipate how the market might move on a given stock.

Media Tenor CEO Roland Schatz visited the Accountants Media Group offices today to explain how his company is combining such information with Extensible Business Reporting Language, or XBRL, technology to benchmark the comparative financial performance of companies, such as Microsoft and Google. The service is thus able to track the image of companies in the media and among financial analysts, while allowing users to analyze and compare the companies' financial results via XBRL.

The service can also keep track of how particular industries, such as the accounting profession, are portrayed in the media, whether because of a glut of stories about accounting irregularities or more positive news about, say, whistle-blowing forensic auditors.

Audit Integrity and Media Tenor International are taking different approaches to how technology can be used to track corporate risk management and reputation management, but their measurements could be valuable in different contexts to accountants and investors alike.

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