Financial statement and disclosure fraud occurs when companies misrepresent financial information or omit material information in public statements. Publicly traded companies report major events to the public through press releases and filings with the Securities and Exchange Commission (SEC). Fraud can occur when a company uses accounting tricks to increase its reported earnings and revenues for a particular reporting period, or fails to disclosure material liabilities or adverse events. Common types of financial statement and disclosure fraud include:
• Improper revenue recognition. In order to make itself look more profitable than it is or to meet analysts’ expectations, a company may fraudulently report revenue based on false invoices, or on orders for products that will not be delivered until a future accounting period. Or a company may try prop up revenue by sending customers more product than they can sell, a practice known as “channel stuffing.”
• Understating expenses and debt. The more expenses a company has, the lower its net income. To make net income appear higher than it actually is, companies sometimes keep certain expenses “off the books.” In the infamous Enron scandal, for example, the company used affiliated “special purpose entities” to hide debt that should have appeared on the company’s financial statements.
• Slush fund/cookie jar accounting. Companies obviously don’t like to report lower-than-expected earnings, and they have devised many ways to work around this. One practice involves setting earnings aside into reserves – called a slush fund or cookie jar – which can be used at a later date to inflate earnings reports. Investors only see steady, strong growth instead of fluctuations or losses, and are thereby misled.
Providing fraudulent financial statements or disclosures to the SEC or to investors may violate a number of laws. A whistleblower with direct, non-public knowledge about financial statement or disclosure fraud may be able to qualify for a reward under the SEC whistleblower program.
If you have become aware of a company that is making fraudulent statements or failing to disclose material information, contact us here or at 617-855-0331 to learn more about how you can file with the SEC whistleblower program.