| Accounting fraud is often characterized by the: | | | | cases. |
| 1. Misuse/misdirection of funds | | | | Sarbox contains provisions, such as the following: |
| 2. Understating/overstating of revenues | | | | 1. Public companies must assess and divulge the |
| 3. Understating/overstating of expenses | | | | effectiveness of their internal financial reporting |
| 4. Overstating of corporate asset values | | | | controls. |
| 5. Underreporting of liabilities | | | | 2. Independent auditors must vet these |
| Prosecuting accounting fraud is often aided by a | | | | assessments and disclosures. |
| whistleblower disclosing unethical practices or | | | | 3. Financial reports must be certified by CEOs and |
| unlawful tactics. At times, the whistleblower is | | | | CFOs. |
| someone who also participated in the accounting | | | | 4. Personal loans to any director or executive |
| fraud. | | | | officer are banned in most cases. |
| Law enforcers may offer a plea bargain with a | | | | 5. A stock-exchange-listed company must have a |
| diminished sentence or penalties to the | | | | 100% independent audit committee whose sole |
| whistleblower for exposing his "guiltier" associates. | | | | task is to oversee the relations between the |
| Protection from retaliation may also be provided. | | | | company and auditor |
| In extreme cases, the whistleblower (along with | | | | 6. More severe civil and criminal penalties for |
| his family) may also go into the government's | | | | violating SEC rules and longer jail sentences plus |
| witness protection program. | | | | bigger fines for execs who intentionally misstate |
| In publicly listed companies, creative accounting | | | | their company's financial status |
| tactics, not necessarily among those listed above, | | | | 7. Protection for whistleblowers to wina. |
| may be regarded as fraud. When such tactics are | | | | Reinstatementb. Back payc. Benefitsd. |
| detected, a government oversight agency, like | | | | Compensatory damagese. Abatement ordersf. |
| the Securities and Exchange Commission, may | | | | Attorney's fees and legal expenses within reason |
| launch an investigation. | | | | Fallout from Fraud |
| Sarbox Response | | | | In the three-year period before Sarbox became a |
| The Public Company Accounting Reform and | | | | law, the SEC reported that accounting fraud |
| Investor Protection Act, also called the | | | | showed a 41% increase: from only 79 cases in |
| Sarbanes-Oxley Act (or Sarbox), was speedily | | | | 1998 to 112 in 2001. |
| passed in 2002 in response to the wave of | | | | Many believe that the stock market downturn of |
| accounting scandals that occurred in corporate | | | | 2002 was caused by a widespread perception |
| America that year. | | | | that many publicly listed companies (such as Enron |
| It was in 2002 that the countries biggest | | | | and WorldCom) may be cooking the books. |
| accounting firms, like Arthur Andersen, Ernst & | | | | More recently, an accounting fraud scandal arose |
| Young, Pricewaterhouse Coopers, etc., were | | | | to rival Enron and WorldCom. AIG is still being |
| charged in court or admitted negligence in their | | | | investigated for accounting fraud as a result of |
| duties. | | | | the mutual funds and insurance fiasco of 2004. |
| The government held that these accounting firms | | | | But recent investigations uncovered more than a |
| were tasked with identifying and preventing the | | | | billion dollars in accounting transaction errors. |
| publication of bogus financial reports. As a result | | | | Oftentimes, the worse punishment is loss of |
| of their neglect or collusion, their clients were able | | | | support for the offending company. So far, AIG |
| to publish reports that gave a misleading | | | | has already lost around 50 billion dollars in market |
| impression of the client company's financial status. | | | | capital as a result of the investigations. |
| Accounting fraud reached billions of dollars in some | | | | |