SEC Targets Accounting Fraud in Financial Reporting
In the early 2000s, the U.S. Securities and Exchange Commission (SEC) was abruptly reminded about the dangers of accounting fraud after Enron and WorldCom collapsed within months of each other. In the years following these corporate accounting scandals, the SEC maintained an enforcement regime that prioritized identifying and rooting out similar corporate accounting frauds.
Recently, the SEC has continued to focus its enforcement efforts on accounting fraud as well as other violations that affect retail investors. In 2016 and 2017, approximately 20% of the SEC’s standalone enforcement actions related to issuer reporting and accounting violations. In 2018, 16% of the SEC’s standalone enforcement actions related to issuer reporting and accounting violations, including actions against prominent companies such as Tesla Inc., Theranos Inc., and Walgreens.
Despite the SEC’s continued focus on accounting fraud, companies continue to “cook the books” when it is necessary to make the numbers. Fortunately for investors, whistleblower tips have significantly aided the SEC in quickly identifying and halting such frauds. In fact, since the enactment of the SEC Whistleblower Program in 2011, whistleblower tips have consistently been one of the SEC’s most powerful weapons in its law enforcement arsenal against accounting fraud.
SEC Whistleblower Program
In in response to the 2008 financial crisis, Congress passed the Dodd-Frank Act, which, among other things, created the SEC Whistleblower Program. Under the program, whistleblowers may be eligible for monetary awards when they report original information to the SEC about violations of federal securities laws, including accounting fraud. If a whistleblower’s tip leads to a successful enforcement in which the SEC obtains more than $1 million, the whistleblower is eligible to receive an award of between 10% and 30% of the total monetary sanctions collected. In certain circumstances, even auditors and accountants may be eligible for awards under the program.
The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Whistleblowers can submit a tip anonymously to the SEC if represented by counsel.
Whistleblower Tips Aid the SEC in Identifying and Halting Accounting Fraud
Whistleblower tips related to violations in corporate disclosures and financial statements have consistently been one of the most common types of tips submitted to the SEC. In fact, the number of these tips has increased in every year since the SEC Whistleblower Office opened its doors:
- 2011: 51 tips related to corporate disclosures and financials
- 2012: 547 tips related to corporate disclosures and financials
- 2013: 557 tips related to corporate disclosures and financials
- 2014: 610 tips related to corporate disclosures and financials
- 2015: 687 tips related to corporate disclosures and financials
- 2016: 938 tips related to corporate disclosures and financials
- 2017: 954 tips related to corporate disclosures and financials
- 2018: 983 tips related to corporate disclosures and financials
Red Flags for Identifying Financial Statement and Accounting Fraud
Accurate financial reporting is integral to maintaining public markets that function fairly and efficiently. The SEC relies on industry insiders, such as the ex-Monsanto executive, to help identify and report accounting fraud and to aid in successful enforcement actions. Former Enforcement Director Andrew Ceresney has noted that although the SEC’s focus on accounting fraud has yielded positive results, it is important to remain vigilant against such misconduct and remember the causes of previous corporate accounting scandals as these causes continue to be the same in new accounting scandals. Red flags include:
- Significant pressure to meet earnings and other performance expectations;
- Excessive focus on short term performance rather than longer term success;
- Poor oversight in units and subsidiaries;
- Growth outpacing the reporting and accounting infrastructure; and
- Management’s over-reliance on processes and poor “tone at the top.”
How to Report Accounting Fraud and Earn an SEC Whistleblower Award
To report accounting fraud and qualify for an award under the SEC Whistleblower Program, the SEC requires that whistleblowers or their attorneys report the tip online through the SEC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the SEC Office of the Whistleblower. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.
SEC Targets Accounting Fraud in Fiscal Year 2018
The SEC brought several significant enforcement actions against companies for accounting fraud and violations in fiscal year 2018, including:
- 3/27/18: In Re Maxwell Technologies
- The SEC charged Maxwell Technologies, its sales executive, and former CEO and former controller, in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results. The SEC stated that “Maxwell recorded revenue before it was actually earned, to make investors believe the company’s most important business segment…was growing faster than it actually was.” Maxwell violated antifraud books and records, and internal accounting controls provisions of the federal securities laws. Maxwell was ordered to pay a $2.8 million penalty , while former sales executive and corporate officer Van Andrews was ordered to pay a $50,000 penalty. Maxwell’s former CEO and former controller were also ordered to pay $80,000 in disgorgement and prejudgment interest, and a $20,000 penalty respectively. [Press Release]
- 4/30/18: In Re Panasonic Corporation
- The SEC charged Panasonic Avionics Corp (“PAC”) with fraudulently overstating pre-tax and net income, by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012. PAC backdated an agreement with a state-owned airline, providing misleading information to PAC’s auditor. PAC further lacked sufficient internal accounting controls and failed to keep accurate books and records in connection with their transactions. Panasonic was ordered to pay approximately $143 in disgorgement and prejudgment interest. In a separate Department of Justice criminal action, Panasonic was ordered to pay a criminal penalty of over $137 million for violating the FCPA. [Press Release]
- 9/4/18: SEC v. Tangoe, Inc.
- The SEC charged Tangoe with accounting fraud when they misstated the existence and/or timing of approximately $40 million in revenue, out of a total revenue of $566 million for the years in question. Tangoe violated their publicly stated policy on reported revenue by engaging in sham transactions with a large customer during fiscal years 2014 and 2015, to inflate Tangoe’s revenues that were to be reported for year-end. Tangoe further entered into agreements with a payment processor, and negotiated a series of contractual agreements requiring the processor to make payments that were recognized as revenue for fistcal years 2014 and 2015, thereby reducing Tangoe’s sizeable shortfalls in revenue for the relevant quarters, when they could not be recognized. The SEC charged Tangoe, its former CEO Albert R. Subbloie, former CFO Gary R. Martino, former vice president of finance Thomas H. Beach, and former senior vice president of expense management operations Donald J. Farias, all with violations of federal securities laws. Tangoe was ordered to pay a penalty in the amount of $1.5 million. [Press Release]
For more information about the SEC Whistleblower Program and how to report accounting fraud, download the eBook: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
SEC Whistleblower Attorneys
If you would like more information on reporting accounting fraud, contact an SEC Whistleblower Attorney at Zuckerman Law for a free, confidential consultation. Zuckerman Law is one of the nation’s leading law firms representing whistleblowers in whistleblower rewards and retaliation cases. For more information about SEC whistleblower awards, download our ebook: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
Largest Accounting Fraud Scandals
The table below identifies some of the largest SEC enforcement actions against companies for accounting fraud:
|American Insurance Group (AIG)||$800 Million||Insurance company booked loans as revenue at an estimated $3.9 billion in accounting fraud and conspired to induce traders to inflate the prices of the stocks.|
|WorldCom||$750 Million||WorldCom inflated earnings by more than $11 billion and cost investors close to $200 billion. The deal reflects a civil penalty of $2.25 billion, which was reduced as part of the bankruptcy reorganization.|
|Fannie Mae||$350 Million||Fannie Mae “issued materially false and misleading financial statements in SEC filings and in various reports disseminated to investors.”|
|Time Warner||$300 Million||Time Warner engaged in securities fraud related to its accounting for online advertising revenue. It used “round-trip transactions” to inflate its online advertising revenue to hide the business slow down.|
|Qwest Communications||$250 Million||Qwest intentionally recognized over $3.8 billion in revenue and excluded $231 million in expenses that did not meet generally accepted accounting principles (GAAP) in an attempt to meet their predicted revenue and earnings projections.|
|Computer Associates||$225 Million||Computer Associates prematurely recognized over $3.3 billion in revenue by manipulating its quarter end cutoff dates to meet Wall Street’s quarterly earnings estimates. SEC’s Northeast Regional Office Director Schonfeld compared it to a team “that plays on after the final whistle has blown … until it had all the points it needed to make every quarter look like a win.”|
|Panasonic Corp||$143 Million||Panasonic overstated pre-tax and net income by prematurely recognizing more than $82 million in revenue by backdating an agreement with an airline. Additionally, Panasonic “lacked sufficient internal accounting controls and failed o make and keep accurate books and records in connection with purported consultant retained by PAC.”|
|Weatherford||$140 Million||Weatherford inflated earnings by using deceptive income tax accounting which included an international tax avoidance structure that reduced its effective tax rate (ETR) and tax expense. False financial statements inflated earnings by over $900 million.|
|Healthsouth||$100 Million||Shortly after Healthsouth went public in 1986, it began to “artificially inflate its earnings to meet Wall Street analysts’ expectations and maintain the market price.” Since 1999, it overstated its earnings by over $1.4 billion.|
|Lehman Brothers||$80 Million||Lehman intentionally manipulated their accounting reports through numerous Repo105 transactions that hid their actual debt. When they declared bankruptcy they were $615 billion in debt.|
Accounting Fraud SEC Whistleblower Lawyers
How to Qualify for a SEC Whistleblower Bounty
- See our column in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective.
- See our column in Going Concern: Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up Now More Than Ever.
- See our post in Accounting Today: Whistleblower Protections and Incentives for Auditors and Accountants.
- See our post in The Compliance and Ethics Blog: Shkreli Trial Reveals the Challenges Faced by Compliance Whistleblowers.
Are Accounting Fraud Whistleblowers Protected from Retaliation?
Click here to learn more about anti-retaliation protections for SEC whistleblowers under the Dodd-Frank Act and Sarbanes-Oxley Act.