A Joint Effort to Fight Corporate Fraud
CPAs stand as a solid line of defense in thwarting basic accounting fraud.
CPAs ARE CRUCIAL PARTNERS In addition Ashley noted the FBI will be calling upon CPAs in several ways—including as objective, third-party expert witnesses, as eyewitnesses and as candidates to join the agency. Indeed, the FBI is actively recruiting CPAs as special agents and as analysts. Accountants already are a key part of the FBI team, with 1,300 accountants working as special agents. In fact 15% of the FBI’s new hires for the special-agent position are slated to be CPAs this year. Interested CPAs can find employment applications at www.fbijobs.com. With the AICPA’s help, Ashley said, “we could probably short-circuit this fraud problem in a couple of years.” It’s hoped, he added, in “three or four years” American business and investors will be looking back on this period as a historical anomaly. Ashley said the nation already may be turning the corner on the scourge of billion-dollar fraud schemes, citing the upsurge in prosecutions. He attributed the potential turnaround to the effects of the Sarbanes-Oxley Act, which, he suggested, has helped the FBI as much as it has helped auditors. “These new regulations are going to put the teeth back into what the profession can do, through basically transparent financial statements. And it’s going to help in the long run to put an end to this problem. I don’t see this being a significant long-term crime problem.” WHITE-COLLAR CRIMINALS GET CREATIVE Today, one of the red flags alerting the FBI to a major problem may be a simple financial restatement. But with a record 919 restatements in the five years through June 2002—many concerning huge and ostensibly tightly run companies—the FBI has its work cut out for itself in tracking down every one. “Now,” Slotter added, “just because a restatement was made doesn’t mean a fraud was committed. But it’s a signal you need to look at.”
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The key reason for a restatement, by far, is a revenue-recognition question—involved in at least half of all SEC cases. Restatements for improper revenue recognition also result in larger drops in market capitalization than any other type of restatement. For instance, 8 out of the top 10 market value losses in 2000 related to revenue problems, according to FBI data. And, of the 10 companies, the top three lost $20 billion in market value in just three days due to revenue-recognition problems. “In white-collar crime,” said Slotter, “we keep turning up new types of schemes; it’s really endless. And as the criminal becomes more sophisticated and with increased and improved technology, we’re going to continue to see new and different types of schemes. We see crimes today that, frankly, didn’t exist 10 or 15 years ago. I’m talking about things like identity theft, which, back in the ’80s, was practically unheard of, but now it’s a very personal and pervasive crime. We see all types of advance-fee and investment schemes (see “ Foreign Advance-Fee Scams”) that are incredibly creative and convincing between the perpetrator and the victim. Unfortunately many people lose millions, even billions of dollars.” CRIME KNOWS NO BORDERS But even in the United States, investigations are not confined to the usual centers of corporate activity, such as Wall Street or Silicon Valley. Quiet towns such as Omaha, Nebraska, and Erie, Pennsylvania, have seen their share of business scandal. In addition, according to Dagan, “one of the most disturbing things that we’re seeing is no industry is immune from this.” Even some charities are among those being investigated by the FBI for fraud. (See “ No Industry Is Immune to Scandal.”) As far as the FBI is concerned, CPAs stand as a first line of defense in thwarting basic accounting fraud. “The independence of the CPA remains a crucial element in conducting effective audits,” Dagan said. “You have to continue to be objective, and professional skepticism can’t be emphasized enough.”
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But the FBI doesn’t have all the answers. So with CPAs, auditors and management accountants sharing knowledge and experience, the agency is learning the significance of some recurring themes, particularly in revenue-recognition schemes. “As basic as I think it is,” Slotter said, “you really, really need to look at the yearend transactions closely. The journal entries right before the books are closed on any companies at the end of their fiscal year are incredibly important because so many transactions relative to revenue and expense often occur within those last few days, maybe the last day even.”
Slotter also urged accountants to probe deeper into internal company and subsidiary transactions. But mostly, he said, auditors and accountants need to employ a healthy skepticism. “We all need to ask the right questions,” he said. “And that sometimes means asking the tough questions as to why things were transacted the way they were, why certain items were booked the way they were and assuring ourselves that the answers to those questions are satisfactory and that they make sense.”
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IN THE BATTLE AGAINST CORPORATE FRAUD, the FBI’s top financial crime investigators have taken their case to the CPA profession, seeking expanded cooperation between accountants and law enforcement officers. 
aced with a crisis of corporate fraud in American business, the Federal Bureau of Investigation’s top financial crime investigators have reached out to the CPA profession, seeking expanded cooperation between accountants and law enforcement officers. The AICPA and FBI responded with a joint effort, which was kicked off with a webcast featuring three FBI white-collar crime-fighter chiefs. It was watched nationwide by some 20,000 accountant members. The project is expected to blossom into a deep and wide-ranging partnership in which FBI agents and AICPA members will share and learn from each other the latest fraud-detection and deterrence techniques, auditing “tricks and traps” and the roles and responsibilities of CPAs and law enforcement officials.
Banking.
