Financial statement fraud gangs
In the past, I have talked about delinquent communities here and here. I have argued that most corporate frauds are the work of delinquent communities, where you get a whole gang of people in on the act, aiding and abetting each other and helping themselves to the spoils.
So how big a gang do you need? How a number of does it take to perpetrate a fraud? An average of seven, as per a new study from the Institute for Fraud Prevention.
The study, Control Overrides in Financial Statement Fraud was based on a sample collected by the Government Accountability Office of 834 companies that issued restatements between January 1, 1997, and June 30, 2002. The authors, Robert Tillman and Michael Indergaard of St. John's University observed that 374 companies, or 45 per cent, were accused of securities fraud and subject to shareholder suits, SEC enforcement action or both. For firms accused of fraud, the average number of respondents was 7.2, including including CEOs, CFOs, COOs, general counsel, directors and internal and external auditors.
As per the study, CEOs and CFOs were named as participants in the great majority of fraud allegations, suggesting that the requirement under Sarbanes-Oxley for CEOs and CFOs to certify reports to shareholders should be maintained.
In 21 per cent of cases, external auditors were named as participants and at two-fifths of the firms where financial statement fraud allegedly took place, one or more members of the board of directors was named as participants.
Another interesting finding was that that among all organizational defendants and respondents named in class action law suits or in actions taken by the Securities and Exchange Commission, over half were companies other than the restating firm. Indeed, a number of of these were accounting firms and banks.
In other words, the delinquent communities extend well beyond the company itself.