A new study by the Deloitte Forensic Center found that corporate fraud schemes continue to be a problem even after tough legislation such as the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act. In analyzing 344 SEC’s accounting and auditing enforcement releases (“AAERs”) between 2000 and 2006, the study concluded that between 2001 and 2002, the number of AAERs doubled and then rose by an additional 43% in 2003. This finding is significant because “despite increased enforcement efforts by the SEC – financial statement fraud remains a public concern.”
The most common type of fraud scheme was revenue recognition with 41% of the total. Within revenue recognition, some of the most popular types were recognition of fictitious revenue and recognizing inappropriate amount of revenue from swaps, round-tripping or barter arrangements. The next set of most popular fraud was manipulation of various financial statement items such as expenses and assets which accounted for more than a third of all fraud schemes.
Moreover, as one of the purposes of the SEC issuing these AAERs is to report any antifraud actions that the agency has taken, it is taking more time for the SEC to release a typical AAER. This delay is creating a significant lag time, in years, between the initial fraud and the SEC issuing the AAER. Specifically, the lag time is on average 4.7 years from the start of a fraud scheme to the issuance of the final release. It is clear from the findings of this study that there is a continuous need for private enforcement as a supplement to an overwhelmed SEC.
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