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The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has just published a follow-up study to its landmark 1987 report. Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies, examines financial reporting fraud cases the SEC has brought against U.S. public companies. Here, the authors of the study share some key findings and add their recommendations.
COSO commissioned this study to help in its efforts to combat financial statement fraud and find the answers to these questions: Who is committing fraud? What is the nature? The study examined instances of alleged fraudulent financial reporting by SEC registrants reported in SEC Accounting and Auditing Enforcement Releases (AAERs) in the 11-year period from 1987-1997. The study identified approximately 300 total frauds and specifically covers 200 randomly selected companies involved in financial statement fraud. The study identifies key company and management characteristics that could help auditors identify the warning signs.
Who's committing the fraud?
Companies committing financial statement fraud were relatively small. The typical company had well below $100 million in total assets in the year preceding the fraud. Most companies-78% in fact-were not listed on the New York or American Stock Exchanges. And as might be expected, some companies committing fraud were experiencing net losses or were barely breaking even in the periods before the fraud. The median net income was only $175,000 in the year before the fraud--financial pressures may have provided incentives for the fraudulent activities of some companies.
Senior executives were frequently involved. In 72% of the cases, the AAERs named the CEO; in 43% they named the CFO. As for audit committees, most met about once a year-and 25% of...