CFOs and CAOs most likely named in SEC fraud allegations

Top finance executives, such as chief financial officers (CFO) and chief accounting officers (CAO), represented 44 per cent of the total number of individuals which were charged by the US Securities and Exchange Commission (SEC) in 2008 with committing financial statement fraud, according to a recent survey.

This was the result of the third annual study of SEC Accounting and Auditing Enforcement Releases, conducted by the Deloitte Forensic Center. Apart from CFOs and CAOs, it also found that both corporate chief executive officers and other members of senior management, each represented 24 per cent of allegations, while directors and general counsel both represented four per cent of the executives cited.

Meanwhile, the survey also found that revenue recognition fraud, once the most prevalent form of financial statement fraud, has been in steady decline since the beginning of the decade. The category represented 30 per cent of all financial statement fraud in 2008, down slightly from 33 per cent in 2007.

The other top infractions were improper disclosure (18 per cent), and manipulation of expenses (16 per cent).

“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 the decade. This may have implications for corporate fraud risk assessments and for regulatory policy,” said Howard Scheck, a partner for Deloitte Financial Advisory Services’ Forensic & Dispute Services Practice.

Across industries, financial statement fraud was most prevalent in technology, media and telecommunications companies (30 per cent in 2008), consumer business (29 per cent), financial services (18 per cent), and life sciences and health care (12 per cent). Mr Scheck noted that compared to 2007, fraud by technology and media companies had declined by six per cent, while those by financial services firms and in the consumer sector edged up. He said this could be due to increased regulatory focus on the latter industries.

“Organisations may wish to consider how financial statement risks may be changing and any impact such changes may have on the organisation’s fraud risk assessment and risk management activities,” he said.