CFOs, CAOs as well as CEOs Most Often Named in SEC Enforcement Releases Alleging Fraud
Deloitte Forensic Center study also finds declining prevalence of alleged revenue recognition fraud
NEW YORK, December 15, 2009 — Corporate financial executives, such as chief financial officers (CFOs), chief accounting officers (CAOs) and controllers, collectively represented 44 percent of the individuals alleged in 2008 by the Securities and Exchange Commission (SEC) to have committed financial statement fraud, according to the third annual study of SEC Accounting and Auditing Enforcement Releases (AAERs) performed by the Deloitte Forensic Center, titled “Ten Things About Financial Statement Fraud.” Chief executive officers (CEOs) represented 24 percent of executives cited, the same amount as other members of management. Directors and general counsel were each identified as subjects of 4 percent of the AAERs.
“Nearly one third of the individuals named in the SEC’s enforcement releases alleging financial statement fraud in 2008 were not CEOs or financial executives,” said Toby Bishop, director of the Deloitte Forensic Center. “They were directors, general counsel or members of management involved in functions such as sales, operations and planning. This shows that it’s not only financial executives who could benefit from an awareness of fraud risks in their organizations, so they can take steps to avoid or reduce them.”
Another key finding of the study is the declining prevalence of revenue recognition fraud. While it was the most common financial statement fraud scheme alleged by the SEC in AAERs from 2000 through 2008, representing 38 percent of alleged financial statement fraud schemes, the number of such schemes has declined in all but one year since 2003. Revenue recognition fraud represented 30 percent of such schemes in 2008, down from 33 percent in 2007.
“If alleged revenue recognition frauds continue to decline, they could soon be at a level similar to that of other alleged financial statement fraud schemes rather than being several times more common, as has been the case during most of this decade,” said Howard Scheck, partner in the Forensic & Dispute Services practice of Deloitte Financial Advisory Services LLP. “This may have implications for corporate fraud risk assessments and for regulatory policy.”
Improper disclosures (18 percent) and manipulation of expenses (16 percent) were the other top schemes, which increased in prevalence from 2007 to 2008. In 2007 they represented 13 percent and 12 percent, respectively, of financial statement fraud schemes alleged by the SEC.
In 2008 technology, media and telecommunications (30 percent) and consumer business (29 percent) had the greatest proportion of financial statement fraud schemes alleged by the SEC, followed by financial services (18 percent) and life sciences and health care (12 percent).
Compared to 2007, alleged fraud schemes in technology, media and telecommunications decreased by 6 percentage points, while there were increases in the consumer business (8 percentage points) and financial services industries (5 percentage points) in 2008.
“While the allegations in past AAERs may not be predicative of those in the future, this shift in the prevalence of alleged financial statement fraud schemes may be in part due to increased regulatory attention being given to the financial services and life science and health care industries,” said Scheck. “Organizations may wish to consider how financial statement fraud risks may be changing and any impact such changes may have on the organization’s fraud risk assessment and risk management activities.”
Since 2007, the Deloitte Forensic Center’s “Ten Things About Financial Statement Fraud” annual study has analyzed SEC Accounting and Auditing Enforcement Releases (AAERs). The study’s third edition includes analysis of more than 1,700 AAERs issued by the SEC from January 2000 through December 2008 that were examined and filtered, resulting in 430 AAERs involving 392 companies that are the subject of this study. Please visit www.deloitte.com/forensiccenter to download the full report of this year’s study.
The Deloitte Forensic Center is a think tank aimed at exploring new approaches for mitigating the costs, risks and effects of fraud, corruption and other issues facing the global business community. The Center aims to advance the state of thinking in areas such as fraud and corruption by exploring issues from the perspective of forensic accountants, corporate leaders and other professionals involved in forensic matters. The Deloitte Forensic Center is sponsored by Deloitte Financial Advisory Services LLP.
As used in this document, “Deloitte” means Deloitte Financial Advisory Services LLP and Deloitte Services LP, separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.