Accounting Fraud – Creative Accounting Gone Criminal

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Accounting Fraud – Creative Accounting Gone Criminal
By Amit Mehta

Accounting fraud is often characterized by the:

1. Misuse/misdirection of funds
2. Understating/overstating of revenues
3. Understating/overstating of expenses
4. Overstating of corporate asset values
5. Underreporting of liabilities

Prosecuting accounting fraud is often aided by a whistleblower disclosing unethical practices or unlawful tactics. At times, the whistleblower is someone who also participated in the accounting fraud.

Law enforcers may offer a plea bargain with a diminished sentence or penalties to the whistleblower for exposing his “guiltier” associates. Protection from retaliation may also be provided. In extreme cases, the whistleblower (along with his family) may also go into the government’s witness protection program.

In publicly listed companies, creative accounting tactics, not necessarily among those listed above, may be regarded as fraud. When such tactics are detected, a government oversight agency, like the Securities and Exchange Commission, may launch an investigation.

Sarbox Response

The Public Company Accounting Reform and Investor Protection Act, also called the Sarbanes-Oxley Act (or Sarbox), was speedily passed in 2002 in response to the wave of accounting scandals that occurred in corporate America that year.

It was in 2002 that the countries biggest accounting firms, like Arthur Andersen, Ernst & Young, Pricewaterhouse Coopers, etc., were charged in court or admitted negligence in their duties.

The government held that these accounting firms were tasked with identifying and preventing the publication of bogus financial reports. As a result of their neglect or collusion, their clients were able to publish reports that gave a misleading impression of the client company’s financial status. Accounting fraud reached billions of dollars in some cases.

Sarbox contains provisions, such as the following:

1. Public companies must assess and divulge the effectiveness of their internal financial reporting controls.
2. Independent auditors must vet these assessments and disclosures.
3. Financial reports must be certified by CEOs and CFOs.
4. Personal loans to any director or executive officer are banned in most cases.
5. A stock-exchange-listed company must have a 100% independent audit committee whose sole task is to oversee the relations between the company and auditor
6. More severe civil and criminal penalties for violating SEC rules and longer jail sentences plus bigger fines for execs who intentionally misstate their company’s financial status
7. Protection for whistleblowers to win
a. Reinstatement
b. Back pay
c. Benefits
d. Compensatory damages
e. Abatement orders
f. Attorney’s fees and legal expenses within reason

Fallout from Fraud

In the three-year period before Sarbox became a law, the SEC reported that accounting fraud showed a 41% increase: from only 79 cases in 1998 to 112 in 2001.

Many believe that the stock market downturn of 2002 was caused by a widespread perception that many publicly listed companies (such as Enron and WorldCom) may be cooking the books.

More recently, an accounting fraud scandal arose to rival Enron and WorldCom. AIG is still being investigated for accounting fraud as a result of the mutual funds and insurance fiasco of 2004. But recent investigations uncovered more than a billion dollars in accounting transaction errors.

Oftentimes, the worse punishment is loss of support for the offending company. So far, AIG has already lost around 50 billion dollars in market capital as a result of the investigations.

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Article Source: Articles island – Free article submission and free reprint articles

Avoid Information Based Fraud and Corporate Espionage with Secure Mobile Document Shredding

Yes, your company can be held liable for any information that leaks out from your employee information records, payroll records, financial records, customer lists, supplier invoices, loan applications and approval, project proposals, contracts, research and development reports, marketing materials and even medical files. According to federal privacy laws, you are responsible even if such information was taken through the use of dumpster diving after you have disposed of your office trash. You need to keep your records secure and destroy them through secure mobile document shredding and information destruction services. Any document can be a source of data, so just shred it.

You may be surprised to know that in the United States, dumpster diving is legal. Any document or information media that is in the dumpster is considered fair game for anyone, including thieves whose intention is to use it for information based fraud, corporate espionage and identity theft. RecordShred, a secure document shredding and information destruction service, reports that the Federal Bureau of Investigation has declared information based fraud and identity theft as the fastest growing crimes in America. It seems that every 13 seconds, a case of identity theft happens in the United States. Of such thefts, the Better Business Bureau asserts that about 80% are done from improperly secured paper records. RecordShred cites the American Society for Industrial Security (ASIS) statement that US corporations are losing more than $45 billion dollars every year due to theft of trade secrets.

What many companies are not aware of is the fact that you can be held liable for the theft of any information from your safekeeping. Yes, that is even after you have disposed of the information in the trash. There are several privacy laws, including but not limited to Sarbanes-Oxley, Gramm-Leach-Bliley, Fair Credit Reporting, FERPA, GLB, FACTA and HIPAA, which require all companies to keep all information and data completely private and secure, and to dispose of them by completely destroying them in a properly secure manner. In fact, compliance needs to be backed up by a written verification of secure destruction with a witness. This has to be filed on record and be readily available for auditing purposes. Failure to comply can lead to liability that may amount to millions of dollars.

Any company has to have internal compliance procedures and a professional document shredding and information destruction service that is Sarbanes-Oxley, Gramm-Leach-Bliley, Fair Credit Reporting, FERPA, GLB, FACTA and HIPAA compliant. The service should be able to shred documents – even those that are bound with staples, binder clips or other binding materials. It should include medical files destruction and x-ray film destruction, and also destroy other information media including computer hard drives, disks, cds, dvds, tape, film and all manner of imaging.

A company like RecordShred can provide locked disposal bins of various sizes for all your documents and data media in the office. These are collected according to a certain schedule and destruction is done securely on site. Your company is then provided with a certificate of destruction complete with a witness to ensure your legal compliance with federal laws.

Getting professional services not only gets you the necessary certification requirements but also saves you a lot in costs. In fact, you save as much as 25% as compared to using in house office shredders. In house shredding will eat up precious time and effort from the core responsibilities of your staff; will mean equipment acquisition, maintenance, repair and replacement; and will not cover all types of information media.

Why not avoid information based fraud, corporate espionage and identity theft, as well as all types of liabilities associated with them, through the more convenient and cost-effective professional secure mobile document shredding services.

The Effectiveness of the Sarbanes-Oxley Act of 2002 in Preventing and Detecting Fraud in Financial Statements

Product Description
The collapse of Enron, WorldCom, and other large corporations in 2001 and 2002 motivated Congress to pass the Sarbanes-Oxley Act of 2002 (SOX). The purpose of this legislation was to restore investor confidence in the United States stock markets, and to prevent and detect fraud in financial statements as well. This dissertation examines the effectiveness of SOX for the latter purpose of preventing and detecting fraud, using statistical enforcement data presented by the Securities and Exchange Commission, and financial statement restatement numbers published by the Huron Corporation. The two methodologies utilized to analyze the data were the unpaired t test and the chi square test. Surveys were also emailed to executives and certified public accountants across the country to extract opinions as to the effectiveness of SOX. The statistical analysis results displayed that in 61% to 65% of the data sets, the numbers prior to the enactment of SOX were no different than the numbers subsequent to the enactment of SOX. The majority of the survey respondents feel that the benefits of SOX are not worth the costs, it is not effective in the prevention and detection of fraud in financial statements, and that it should be modified, but not eliminated entirely. While some sentiment exists that SOX is salvageable if revisions are executed, both the quantitative and qualitative analyses indicate support of the null hypothesis, that SOX is not effective in the prevention and detection of fraud in financial statements.

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