When we hear the term "financial fraud," we often think about Ponzi schemes, people manipulating stock prices, or even those just stealing money from investors. But financial fraud encompasses a wide variety of untruthful business practices, including everything from "cooking the books" to make a company look better on paper to making false claims in disclosures about business operations and finances required by the U.S. Securities and Exchange Commission (SEC).
U.S. law attempts to protect investors with securities laws and regulations, tasking the SEC with investigating and civil enforcement of those laws. The SEC may initiate an investigation in many ways, including tips from whistleblowers; referrals from other government agencies; routine reviews of financial reports; SEC filings and disclosures; or through routine or investigative audits.Corporate Disclosures
If a company makes misleading or false statements in its public or SEC statements, or if it fails to make required filings, it may be violating disclosure rules. One of the most common violations of corporate disclosure rules is often related to a company's financial statements. If a company inflates earnings or revenues through accounting tricks, it may also be violating corporate disclosure rules.Fraudulent Accounting
Accounting fraud is intentionally manipulating financial statements to make a company look more financially healthy than it is. When a company falsifies its statements by overstating revenue or income, failing to record expenses or liabilities, or misstating assets, it misleads investors and shareholders of the company. Financial statement fraud accounts for only about 10% of financial fraud cases in the corporate world. But it can be one of the costliest categories of fraud, averaging nearly $1 million in losses.Audits to Detect or Investigate Fraud
Audits aren't specifically designed to ferret out financial fraud. However, auditors are responsible for pointing out "material misstatements" in a company's financial statements resulting from errors or fraud. As a result, audits follow generally accepted accounting principles with procedures that can detect fraud. Auditors will engage in several actions to try to detect fraud, including:
- Engaging in audit brainstorming sessions,
- Testing journal entries for signs of manipulation,
- Examining accounting estimates closely, and
- Looking for significant unusual transactions.
Despite knowing what to look for, auditors may not be able to detect fraud without a tip or whistleblower with inside information. Indeed, whistleblowers are one of the government's most powerful tools to detect and investigate corporate financial fraud.How to Report Accounting Fraud to the SEC Whistleblower Office
If you're considering becoming an SEC whistleblower, you need experienced legal guidance to protect your interests and minimize employer retaliation. Silver Law Group and the Law Firm of David R. Chase have formed a strategic alliance to represent SEC whistleblowers. our attorneys can help you investigate and provide guidance on the best course of action. Call us today at 800.975.4345, or email us to set up a free consultation.