After a global recession was triggered by a series of financial collapses, the banking and financial services industry now requires stricter compliance with rules governing securities and commodities. However, behind the scenes, some parties might choose to commit security fraud to get a leg up on the competition or make a profit off secret information.
As a serious crime, security fraud is often performed by individuals or entities like a brokerage firm in order to keep information from investors and manipulate stock market performance. These individuals may mislead investors and shareholders into investing more money into companies that are not as strong as they appear on paper.
Not only do investors stand to lose millions of dollars because of inaccurate information, confidence in the market plummets, which could have a wide-reaching impact in other segments of the economy like it did during the recession. To combat instances of security fraud, individuals and companies can hire a forensic accountant to examine financial statements and find evidence supporting claims of fraud.
When the Securities and Exchange Commission (SEC) and other government agencies like the Federal Bureau of Investigation suspect individuals or companies of fraud and violations of securities regulations, they may request an investigation into corporate financial statements. Forensic accounting is key to uncovering security fraud and other white-collar crime when alleged criminals try to hide a paper trail.
A company may face litigation because of losses experienced by investors who were dependent on knowledge found in SEC filings and other documents to make their decisions. In this case, a forensic accountant will try to prove the security fraud resulted in investor losses. Not only do these professionals try to find evidence of existing crimes, they anticipate when fraud will occur and will often get in the heads of individuals committing security fraud to bring them to justice.
Security fraud often occurs in the following ways:
Misrepresenting information in SEC filings.
Investors often base their decisions on quarterly or annual earnings reports, SEC filings and other publicly available information. Giving the SEC the wrong information in relation to company assets or performance data is a crime. Misleading investors could result in litigation and civil charges set out by the SEC.
When businesses are suspected of security fraud, they need to investigate suspected violations, such as misrepresentation of the financial statements that aim to artificially boost their performance in the eyes of investors. Individuals who allegedly commit security fraud may have a history of misusing assets or making questionable transactions. It is the job of a forensic accountant to look into a company’s financial statements and tax returns and gather witness accounts and any other supporting documents to determine whether there is evidence of security fraud.
Performing accounting fraud.
Following the recession, corporations are expected to follow disclosure requirements outlined in the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was enacted to increase transparency and reform financial regulations. However, companies may inflate the net worth of their business and hide financial losses and debts if they failed in certain business ventures or took investment risks that did not pay off.
A forensic accountant has in-depth knowledge of requirements for generally accepted accounting principles and securities regulations and compliance, which make them highly qualified for financial analysis in the face of accounting fraud.
A detailed forensic financial analysis will uncover GAAP violations or other inaccuracies. Combing through years worth of records kept by a company, a forensic accountant will determine whether a firm misled investors and the market by inflating assets.
Engaging in insider trading.
When someone at a company has access to valuable corporate information that could affect the value of stocks or other assets, they may be tempted to engage in insider trading. For example, if someone working closely with executives knows the company is in danger of going bankrupt, insiders will anticipate the value of stocks to drop once this news comes out. Before then, they may try to use this knowledge to profit by choosing to cash in on their stocks before the public knows about this bad news. They can also attempt to sell this information to other investors before it is made publicly available.
A company that has had employees accused of security fraud like insider trading may see their reputation damaged as a result. To find information connecting employees to insider trading, companies could look into personal accounts and reconstruct transactions. The evidence supporting claims of insider trading can be gleaned from analyst reports, SEC filings and even online publications and discussions.
Putting money toward scams and other hedge funds.
Another way individuals could defraud investors is through misappropriating funds intended for other investments. Many of these individuals will solicit investments and use sales tactics by claiming they will invest the money in a certain fashion to give them a high rate of return. In reality, these individuals may take the money given to them and invest the money into other hedge funds.
In addition to putting money toward other hedge funds, some investors may be unaware their investments are actually circulated to other victims of Ponzi and Pyramid schemes. To investigate into claims of Ponzi schemes and using money for other hedge funds, a forensic accountant will follow the cash to the final destination.
With a serious crime like security fraud, companies should ensure they are hiring a forensic accountant who is skilled in financial analysis and research. A forensic accountant is integral to quantifying and locating assets, as well as determining losses. These professionals are experienced in going through massive amounts of information found in financial documents and other forms of communication while still making sure they focus on the goals of the case.
With the need for compliance with securities regulations and accounting requirements, a forensic accountant will help ensure firms play by the rules, helping investors to maintain confidence in the economy.
