CFOs, CAOs, CEOs Most Often Accused of Financial Statement Fraud

December 15, 2009 (PLANSPONSOR.com) - Corporate financial executives, such as chief financial officers (CFOs), chief accounting officers (CAOs) and controllers, collectively represented 44% of the individuals alleged in 2008 by the Securities and Exchange Commission (SEC) to have committed financial statement fraud, according to a study performed by the Deloitte Forensic Center.

The third annual study of SEC Accounting and Auditing Enforcement Releases (AAERs) titled “Ten Things About Financial Statement Fraud,” indicates chief executive officers (CEOs) represented 24% of executives cited, the same amount as other members of management. According to a press release, directors and general counsel were each identified as subjects of 4% of the AAERs.

However, as Toby Bishop, director of the Deloitte Forensic Center, pointed out: “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. 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% 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% of such schemes in 2008, down from 33% in 2007.

Improper disclosures (18%) and manipulation of expenses (16%) were the other top schemes, which increased in prevalence from 2007 to 2008, according to the press release. In 2007 they represented 13% and 12%, respectively, of financial statement fraud schemes alleged by the SEC.

In 2008 technology, media and telecommunications (30%) and consumer business (29%) had the greatest proportion of financial statement fraud schemes alleged by the SEC, followed by financial services (18%) and life sciences and health care (12%). 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.

The study can be downloaded from www.deloitte.com/forensiccenter.

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