In Desperate Times: More Savvy and Cooperation at the SEC.

• Author: McCrary, Deanna
• Position: Securities and Exchange Commission investigations

"Tempt not a desperate man," wrote Shakespeare in "Romeo and Juliet." In today's dog-eat-dog economy, burdened by daily dot-com failures and the increasing instability of the markets in the aftermath of the terrorist attacks of Sept. 11, temptations and "desperate companies" abound.

By honoring Shakespeare's admonition, the SEC is becoming more savvy at recognizing the fraudulent techniques of financially desperate companies, and at the same time, more understanding of the effects of desperate times, by offering a way out of prison terms and other harsh penalties for those who come clean and cooperate.

TRENDS IN FINANCIAL STATEMENT FRAUD

Charles Niemeier, SEC chief accountant, division of enforcement, speaking at the UC Berkeley Haas School of Business 12th Annual Conference on Financial Reporting, said that today the SEC is investigating more large companies than ever before. This may be due, at least in part, to a correlating increase in the number of informants who have come forward--many of whom are disgruntled, former employees, he says.

The SEC also is experiencing an increase in investigations into companies' operations outside the United States. "We're in a new world today," says Niemeier. "We are finding disturbing situations in which problems arise only in a company's non-U.S. operations."

Niemeier says that the SEC currently has 260 financial statement fraud cases underway. And, perhaps not surprisingly, revenue recognition continues to be the number one offender as companies attempt to recognize revenue before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void or delay the sale.

According to Niemeier, other types of fraud that the SEC is uncovering include:

* Constant changes in estimates that are not disclosed. Niemeier says this is the biggest emerging fraud issue today.

* Bill-and-hold transactions stand out as by far the most common form of revenue recognition fraud, says Niemeier. He says 90 percent of bill-and-hold transactions the SEC has come across have not met the criteria for revenue recognition.

* Channel stuffing, in which a company will "stuff the distribution channel" with products, thereby inflating accounts receivable. Channel stuffing may work for awhile, however problems arise when high sales from past quarters are made at the expense of poor sales in another quarter. Niemeier says the SEC is carefully examining companies' cash...