AmTrust Workplace

Cooking The Books To Drive Up Stock Prices: A Serious Crime With Civil Liability Exposures

The former CFO of a publicly traded financial services and marketing organization based in Florida faces multiple counts of making false statements and entries, as well as conspiring to commit, and committing, securities and wire fraud.

The indictment alleges that the former CFO and his co-conspirators carried out a complex financial fraud scheme to manipulate the organization's financial statements and artificially inflate its earnings between 2011 and 2014. They allegedly engaged in "cookie jar" or "cushion" accounting by leaving over a million dollars in unsupported expense accruals in the ledgers and then systematically reversing it in later quarters to meet earning goals.

They also allegedly misrepresented some expenses as "deal costs," which artificially inflated publicly reported adjusted earnings metrics. The indictment also accuses them of making materially false statements to conceal the false entries from auditors, shareholders, and the public. While the former CFO was allegedly inflating the organization's finances, he made millions of dollars by selling his own shares in the organization.

According to those prosecuting the former CFO, his financial fraud scheme not only harms investors, but could negatively affect financial markets globally. "Former Chief Financial Officer at Publicly Traded Company Charged with Accounting and Securities Fraud Scheme," www.justice.gov (Dec. 20, 2017).


Commentary

This particular case is more complicated than your usual fraud and embezzlement matter, and it is a serious crime. Driving up a stock price through fraud and financially benefiting from it is a crime and will most likely lead to a shareholder civil case for fraud as well.

According to the Association of Certified Fraud Examiners, employee and executive fraud costs U.S. organizations nearly five percent of their revenue every year. In most of these cases, as in the case discussed above, multiple employees collude to commit the fraud.

When segregating functions, make sure to spread financial access and oversight roles across departments, rather than among employees who are all in one team. It is more difficult for employees in multiple departments to find the opportunity for working together to commit fraud.

Watch for signs of conspiracies to commit fraud by monitoring employee activity and paying particular attention to unusual transactions or queries taken by multiple employees around the same time. For example, multiple employees looking at the same rarely used accounts could be a sign of criminal activity. Investigate any strange behavior immediately to minimize the damage.

Finally, the best way that organizations can reduce the risk of employee collusion is to create a culture that is not permissive of wrongdoing. Investigate all reports and take disciplinary action in all cases, no matter the offender’s level in the organization.

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