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Financial Statement Fraud Not a Solo Job, According To IFP Study of Pre-Sox Years
Rather than being the solo work of a rogue executive, financial statement fraud is a product of collaboration involving an average of seven people, according to a new study conducted by the Institute for Fraud Prevention (IFP).
In an examination of 834 companies that filed financial restatements between 1997 and 2002, the study – “Control Overrides in Financial Statement Fraud” – found that 374 (45 percent) were accused of securities fraud and subject to shareholder suits, SEC enforcement action or both. In those cases, seven individuals on average were implicated. They occupied a variety of positions, including CEO, CFO, chief operating officer, general counsel, members of the board of directors, and internal and external auditors.
The study found that in cases of fraud, the board of directors often was driven by senior management and the CEO who also served as chairman.
“Far from being a solitary act, securities fraud necessarily requires complicity,” said Dr. William Black, executive director of the Institute for Fraud Prevention. “In situations where the CEO is chair of the board of directors, a body that is supposed to oversee management, independence can be compromised. When independence falls by the wayside, fraud is the consequence.”
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