Mitigating the Risk of Common Fraud Schemes: Supplemental Analysis of SEC Enforcement Actions


As a follow up to its recent report, Mitigating the Risk of Common Fraud Schemes: An analysis of SEC Enforcement Actions, the Anti-Fraud Collaboration (AFC) analyzed data collected during its comprehensive review of 204 SEC enforcement actions to provide additional insights into various data attributes related to the 140 in-scope fraud schemes (AFC report).

The scope and review period of this supplemental analysis remained the same as that noted in the original report, which covered publicly available data released by the Securities and Exchange Commission (SEC) from January 1, 2014 through June 30, 2019. The 531 enforcement actions released by the SEC during the review period included cases involving a wide range of alleged misconduct, related but not limited to, intentional and non-scienter frauds, issuer reporting and disclosures, auditor shortcomings, absent or insufficient internal controls, deficient disclosure controls, non-GAAP measures, the Foreign Corrupt Practices Act, securities offerings, insider trading, broker dealer, and cyber-related misconduct.

Our analyses focused on those SEC enforcement actions involving accounting and reporting issues, specifically financial statement frauds and books and records violations. For the purposes of our analyses, we refer to these as “in-scope fraud schemes.”  See Appendix A: Scope and Methodology in the AFC report (page 29) for more details.

I. Top In-Scope Fraud Schemes by Industry

  • Of the industry sectors that were most commonly charged by the SEC, technology services companies had the most instances of revenue related issues with 11 enforcement actions, followed by the manufacturing (8), healthcare (8), and energy (7) industry sectors.
  • For reserves related issues, banking and finance (8), technology services (5), and manufacturing (4) companies were charged most frequently.
  • Healthcare (3), technology services (3), and manufacturing (2) companies had enforcement actions involving inventory related issues.
  • Banking and finance (12) companies were charged in 86 percent of the cases involving impairment related issues.

II. Respondent Types by Top In-Scope Fraud Schemes

  • When fraud occurs, the SEC often charges the issuer/company. With a consistent focus on holding individuals accountable, the SEC has also frequently charged company executives and employees for their conduct, either along with the company or independently. Due to the number of entities involved, each case often requires a significant amount of time from the onset of an investigation to when the SEC brings an action against the parties. As many cases involve several entities that can include company management, board of directors, auditors, financial institutions, stakeholders, and other third parties, the SEC can issue multiple enforcement actions that cover the same.

  • More than 90 percent of the total number of in-scope fraud schemes involved either one or two respondents per For purposes of the analysis, enforcement actions that were part of the same underlying fraud schemes or charges were grouped together. Instances in which the enforcement actions involved one respondent include either the issuer/company or an individual.

  • Of the 140 in-scope fraud schemes, 47 instances (34 percent) did not include charges against the issuer/company during the review period. We did not verify whether an issuer/company was charged for the same fraud in a separate enforcement action prior to January 1, 2014 or after June 30, 2019.

  • When looking at the positions held by individuals identified in SEC enforcement actions, the Chief Financial Officer is most often named, followed by the Chief Executive Officer and the Controller. Other employees cited include those in finance and accounting functions such as the Finance Manager, Finance Director, Vice President of Finance, and Chief Accountant. We also noted that respondents cited in the enforcement actions could have more than one role, which would result in more than one designation illustrated herein. See section SEC Enforcement Observations in the AFC report (page 20) for additional information.

III. Duration of In-Scope Fraud Schemes

  • Most fraud schemes identified in the enforcement actions occurred over a period of time, typically between one and three years until the scheme was uncovered or ceased prior to its discovery. Eight of the enforcement actions in our study did not specify the time periods over which the fraud schemes occurred, and so those enforcement actions were excluded from the analysis below.

    • The most common fraud schemes were perpetrated for just over two years on average, with the exception of inventory related frauds, which tended to last 2.65 years.

  • While the fraud schemes tended to average just over two years in duration, the range in the duration of the frauds committed varied, from as short as under three months for three of the fraud schemes analyzed, to as many as 8.2 years for revenue related fraud schemes.
    • Revenue related fraud issues ranged from under 3 months to 8.2 years.
    • Reserves related fraud issues ranged from under 3 months to 7.5 years.
    • Inventory related fraud issues ranged from 1 year to 5.8 years.
    • Impairment related fraud issues ranged from under 3 months to 5.2 years.
  • Based on the analysis, it appears that financial statement frauds can be perpetrated for extended periods without being detected. This may be the case regardless of the commonality, complexity, and perceived risk of the accounting areas involved. The results of this supplemental analysis highlight the importance for gatekeepers to stay vigilant in conducting proactive and routine fraud risk assessments, and to commit to continually improving their organizations’ fraud risk management practices and programs.

In order to glean insights from financial reporting supply chain members on the results of its analysis, the AFC facilitated a roundtable event. The objective was to discuss some of the common fraud schemes, the contributing factors identified in the analysis, and identify lessons learned from the perspective of their different roles. A summary of the key takeaways from the roundtable event, Mitigating the Risk of Fraud: Practical Observations and Lessons Learned, was released in June 2021.

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Categories: Risk