Throughout the last year, we’ve continued to read about SEC enforcement actions and the Enforcement Division’s continued focus on financial fraud. Many expect the Enforcement Division to be more active and aggressive in the coming years. To help companies protect against financial fraud, a recent study from the Anti-Fraud Collaboration analyzed SEC enforcement actions and provides insight into common financial fraud themes – it says the most common schemes and areas at higher risk for manipulation aren’t necessarily new. Here are some of the study’s findings:
The kinds of business challenges that were frequently present in enforcement cases—pressure to meet analyst expectations, increased supplier costs, slowing demand for products, and more—are exacerbated during a crisis like COVID-19. These kinds of challenges and issues suggest a need for the board and audit committee, management, and internal and external auditors to be attuned to both quantitative and qualitative metrics.
The most common type of fraud incident was improper revenue recognition (43%). Reserves manipulation (24%), inventory misstatement (11%), and loan impairment issues (11%) were other common financial statement fraud schemes. Improper revenue recognition was among the top two fraud schemes from 2014 through mid-2019.
Some industries were charged more frequently than others. Technology services companies (17%) were the most commonly charged industry. Finance (13%), energy (11%), and manufacturing (9%) were also charged in the enforcement actions.
The study includes case examples of common financial fraud schemes along with the result. In terms of what companies should do, the study reminds companies to continue exercising skepticism and attention to potential risks. It suggests companies should remain focused on the fundamentals—controls, processes, and environments that impact financial recordkeeping and decision-making—and company-specific risks by conducting regular risk assessments.
-Lynn Jokela, TheCorporateCounsel.net January 21, 2021