The Fraud Examiner

Altered Statements: Are More Accounting Frauds on the Horizon?

By Scott Patterson, CFE

December 2014


It’s been more than a decade since a slew of large accounting scandals rocked the financial world, including Enron, WorldCom and Tyco, among others. Enron in particular grabbed the nation’s attention like few cases before it: The tale of hubris, cover-ups and, sadly, financial ruin for many of the corporation’s employees and shareholders was splashed across news networks and journals worldwide. It was a case study explored in bestselling books and film, galvanizing public sentiment into a chorus somewhere along the lines of:  “How could this happen?”

In the wake of Enron – and while the other large scandals were still coming to light – work began in earnest to bring new regulation that could catch the next big financial fraud. Extensive congressional hearings on the Enron fiasco resulted in the passage of 2002’s Sarbanes-Oxley Act, intended to increase oversight and accountability among public companies in an effort to mitigate the risks of future accounting frauds.

As a result of Sarbanes-Oxley, the Public Company Accounting Oversight Board (PCAOB) was created, whose mission “is to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.” Along with creating new auditing standards through the PCAOB and a host of other regulatory measures, Sarbanes-Oxley introduced a key provision that earned a lot of attention among CEOs and watchdogs alike: executives were now required to sign off on financial reports, negating a company chief’s ability to plead ignorance as a defense of leading a corporation through a maze of fraud.  

While there hasn’t been a case to rival Enron among public corporations since the passage of Sarbanes-Oxley 12 years ago, financial statement fraud is still on the radar for many fraud experts. Among the reasons: increased stock-market pressure with an emphasis on bottom-line results; and stepped-up enforcement in this area by the SEC (leading to the exposure of more schemes).


What is Financial Statement Fraud?

In the ACFE’s 2015 Fraud Examiners Manual (FEM), financial statement fraud is defined as “the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users. Note that financial statement fraud, much like all types of fraud, is an intentional act.”

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