New Fraud Crackdown Looms
With accounting-fraud cases at nearly a 10-year low, complacency might be the biggest fraud risk facing chief financial officers. Large fraud-related restatements of corporate earnings reports have fallen sharply since the financial crisis, but that doesn’t mean that companies aren’t still vulnerable to them. “There still is financial-reporting fraud going on out there,” said Andrew Ceresney, the new co-director of the Securities and Exchange Commission’s Division of Enforcement. And the agency is making a concerted push to uncover it. Last week, the SEC announced the formation of a Financial Reporting and Audit Task Force, which it hopes will catch accounting frauds at earlier stages.
Of course, companies have made big strides in improving their internal controls since the Enron-era accounting scandals, in part because of the rules imposed by the Sarbanes-Oxley law in 2002. But accounting experts and regulatory officials say there are warning signs that a new round of fraud could be in the offing as the recovery continues. While big restatements are less common these days, a growing percentage of companies are making minor revisions to their financial results. Auditor turnover is up. And long-term interest rates are starting to rise, potentially squeezing some business deals and raising temptations to cook the books. “The next fraud’s going to happen, it’s just a matter of time,” said James Walker, CFO of publisher Walch Education and former chairman of the Institute of Management Accountants’ ethics committee. The financial crisis exposed the need for better internal safeguards, more transparency and a thicker capital cushion at some companies. But since the crisis began in 2007, the number of companies making fraud-related restatements has fallen by almost half, compared with the six preceding years, according to Audit Analytics. Last year, the research firm’s data show, auditors blamed fraud...
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