Check Your Numbers: Detecting Accounting Fraud

April 2015

IN THIS ISSUE

— The Recent Rise In Accounting Fraud Cases And Why It Matters
— What Accounting Fraud Means To Your Company

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine a recent trend that suggests accounting fraud is increasing, and look at what your company can do about it.

THE RECENT RISE IN ACCOUNTING FRAUD CASES AND WHY IT MATTERS

Accounting fraud is certainly not a new phenomenon, especially since the accounting scandals of the early 2000s ushered in the Sarbanes-Oxley regulatory regime. Yet more than a decade after those reforms were put into effect, recent studies have indicated that regulators are prosecuting more instances of accounting fraud — especially for lax internal controls at some publicly traded companies.

The increase in enforcement is due, in part, to a greater interest in such cases by officials at the U.S. Securities and Exchange Commission, but it appears that the agency may be reacting to the environment in which it regulates. An increase in the number of earnings restatements is one indicator that companies are having a difficult time complying with new reporting standards, or are not following them as stringently as regulators had hoped.

WHAT ACCOUNTING FRAUD MEANS TO YOUR COMPANY

Aside from civil enforcement penalties and possible criminal prosecution, internal control problems and material misstatements can harm your company in other ways. Enforcement inquiries — even those that may not lead to prosecutions — are fodder for securities trial attorneys upon which they can base civil shareholder derivative actions. Often involving dozens or hundreds of plaintiffs — each of whom is or was a shareholder of a company’s stock — these actions will use enforcement efforts as the basis for long, costly and sometimes complicated arguments about how certain actions taken by management diluted shareholder value. Defending your company against such efforts can drain legal budgets and create public relations headaches.

While vetting of such claims is one important step, an equally important and proactive approach is to review the internal controls in place at your company, and also to create increased awareness about disclosure required when merger or acquisition talks occur, as these discussions — when conducted in private and without appropriate disclosure thereafter — are a key point upon which plaintiffs attorneys try to make their case. By knowing the requirements and promoting program to follow them, your company can prevent arduous circumstances that could otherwise create difficulty.