Financial-Statement Fraud not a Solo Job, According to Study of Pre-Sox Years



May 8, 2007 - WASHINGTON, D.C. - Rather than being the solo work of a rogue executive, financial-statement fraud is a product of collaboration, involving an average of seven people, according to a new study conducted by the Institute for Fraud Prevention (IFP).

In an examination of 834 companies that filed financial restatements between 1997 and 2002, the study Control Overrides in Financial Statement Fraud“ found that 374 (45 percent) were accused of securities fraud and subject to shareholder suits, SEC enforcement action or both. In those cases, seven individuals on average were implicated. They occupied a variety of positions, including CEO, CFO, Chief Operating Officer, General Counsel, members of the Board of Directors, and internal and external auditors.

The study found that in cases of fraud, the Board of Directors often was driven by senior management and the CEO also served as Chairman.

Far from being a solitary act, securities fraud necessarily requires complicity, said Dr. William Black, Executive Director of the Institute for Fraud Prevention. In situations where the CEO is Chair of the Board of Directors, a body that is supposed to oversee management, independence can be compromised. When independence falls by the wayside, fraud is the consequence.

By way of example, Black noted that, according to the study, more than a third (39 percent) of the companies accused of fraud were so-called New Economy industries, including dot-coms, energy traders and telecommunications.

When the dot-com fever hit its peak, there was a loss of perspective as people saw the possibility of making a lot of money very quickly, he said. We saw what former Federal Reserve Chairman Alan Greenspan called irrational exuberance. Good business practices were ignored under the pressure to meet earnings forecasts.

High-profile corporate fraud led to the 2002 enactment of the Sarbanes-Oxley Act, which imposed stringent requirements on management, boards and external auditors to provide assurance on internal controls.

It is highly unlikely that fraud will ever be eliminated, Black said. But there are safeguards that can be put into place to help better detect and prevent it. Although it will be some time before we are able to analyze the true effectiveness of Sarbanes-Oxley, the law is meant as a wakeup call to Corporate America that it had to do a better job.

The authors of the study, Robert Tillman and Michael Indergaard of St. John's University, based their analysis on a sample of 834 companies that issued restatements between January 1, 1997, and June 30, 2002. The sample was collected by the General Accountability Office.

The study may be found at, under the Research Grants heading.

The Institute for Fraud Prevention is a powerful coalition of domestic and international universities dedicated to multi-disciplinary research, education and prevention of fraud and corruption. The IFP's primary goal is to improve the ability of business and government to combat these crimes and to educate the public on effective methods of recognizing and deterring them. The IFP is funded by contributions from its members: the Association of Certified Fraud Examiners (ACFE), The American Institute of Certified Public Accountants (AICPA), Grant Thornton LLP, and D-Quest, Inc. It also receives intellectual support and assistance from various government, academic, public and private organizations.

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