The U.S. Securities and Exchange Commission and the U.S. Department of Justice have stepped up their games in identifying and investigating possible accounting fraud and foreign corrupt practices.
The consequences for companies who come under scrutiny by these federal agencies are costly in terms of time, distraction, possible fines and reputation. Legal professionals mostly agree that fines can be limited for those companies that demonstrate an effective compliance program is in place.
Trends in Fraud and Fraud Detection
The Association of Certified Fraud Examiners' 2014 Report to the Nations found that, while less than ten percent of the cases in the survey involved financial statement fraud, the median financial impact of those cases was $1,000,000. Tips are the most common form of detection (43 percent); however, the proactive methods for fraud detection--management review, internal audit, plus account reconciliation activities (combined)--detected 40 percent of financial statement frauds. Twenty-six percent of those cases were perpetrated by executive management and 17 percent were perpetrated by the sales department. Financial statement fraud cases appeared most frequently in three industries; construction, oil & gas and manufacturing.
Entitled "Overcoming Compliance Fatigue," EY's 2014 GlobalFraud Survey revealed that fraud risks are not declining, and noted "The willingness of respondents to justify certain activities when under financial pressure shows an interesting correlation with their role.
* CFOs are more likely than any other role to justify making changes to assumptions relating to valuations and reserves to meet financial targets.
* General counsel respondents are more likely than others to justify backdating contracts to meet financial targets.
* Sales and marketing respondents are most likely to justify introducing more flexible return policies to meet financial targets.
Based on its Global Forensic Data Analytics Survey, EY recommended companies consider expanding the use of forensic data analytics (FDA) as a means of enabling companies to maximize how their own information can be used to identify fraud indicators and support investigations.
The focus of testing may include accounts payable and vendor master data, expenses and entertainment transactions, payroll and capital projects data, and even data from external sources such as social media sites. FDA was also recommended for use in supporting due diligence...