Dec.16, 2009

General counsel who ignore the rapidly changing risks of financial fraud at their companies could find themselves in trouble with the Securities and Exchange Commission, a study released Tuesday by the Deloitte Forensic Center shows.

The center's third annual study of SEC Accounting and Auditing Enforcement Releases reviewed more than 1,700 accounting and auditing enforcement actions taken by the SEC between 2000 and 2008. It found that in 2008, nearly a third of those who allegedly committed financial statement fraud were not CEOs or financial executives. They were directors, general counsel, and managers.

In fact, directors, general counsel, and management made up 32 percent of the SEC's enforcement actions last year, according to the study. Meanwhile, CEOs represented 24 percent of the executives cited. Corporate financial executives, such as chief financial officers, chief accounting officers, and controllers together made up 44 percent.

"As gatekeepers, general counsel will continue to be in the crosshairs," said Howard Scheck, a partner at Deloitte Financial Advisory Services, who's a former branch chief in the SEC's enforcement division. "They will have to remain vigilant to make sure they are part of the proactive process to prevent, detect and deter accounting fraud."

And general counsel also should closely track the changing nature of financial accounting fraud, Scheck said. The most popular financial scheme was revenue recognition fraud, which made up 30 percent of the SEC's 47 enforcement actions in 2008, down from 33 percent in 2008.

But other types of fraud grew last year. Improper disclosures came in second at 18 percent, up from 13 percent in 2007. Manipulation of expenses made up 16 percent, up from 12 percent in 2007. "Those changes can be significant when general counsel are involved in risk assessments and deciding what sort of anti-fraud measures would be appropriate," says Toby Bishop, director of the Deloitte Forensic Center.

The industries targeted by the SEC for financial fraud are changing too, the study shows. The largest percentage of the agency's enforcement actions in 2008 (30 percent) was technology, media, and telecommunications companies. But that was down from 36 percent in 2007.

Meanwhile, the number of alleged fraud schemes in other industries grew. Fraud at consumer businesses was close behind at 29 percent, up from 21 percent in 2007. Financial services came in third at 18 percent, up from 13 percent.

"While the past is no prediction of the future," Bishop said, "it does show that one needs to be careful about relying too heavily on older assumptions about where fraud may be occurring."