Illegal Corporate Activities and Their Effect on Financial Statement Disclosures: How Forensic Accountants Can Help – End of Summer Report

Illegal Corporate Activities and Their Effect on Financial Statement Disclosures: How Forensic Accountants Can Help

Anthony L. Fanelli     

The purpose of this paper is to examine recent sanctions and legal actions taken against multi-national corporations in emerging markets by the Securities and Exchange Commission (SEC) and other non-US regulatory agencies to develop an exploratory study to determine the effects of illegal activity on financial statement disclosures.  In order to determine if an illegal activity has occurred and if any financial statement disclosure is required the Foreign Corrupt Practices Act (FCPA) and international security agencies, such as the SEC, must enforce security laws.  Based on the research findings it is proposed that Forensic Accountants can help the independent auditor and those in charge with corporate governance, to properly determine if an illegal act that has occurred should be disclosed.

It is evident that illegal corporate activities including corruption and bribery have increased as a result of the global economy expansion especially in emerging markets.  Bribery is the crime of giving or taking money or some other valuable item in order to influence a public official (any governmental employee) in the performance of his or her duties. Bribery can also involve corrupt dealing with the employees of a business competitor in order to secure an advantage.[i]   Exceptions include for the facilitation or to expedite the performance of a routine governmental action; where the payment was lawful under the laws and regulations of the foreign government where the gift took place; or where the giving of value was a reasonable and bona fide expenditure as, e.g., for travel and lodging expenses incurred by the foreign person for the purposes of the promotion, demonstration, or explanation of products or services, or for the execution of a contract with the said foreign person.

On March 18, 2010 the Securities and Exchange Commission charged Innospec, Inc., an American chemical company, with violating the Foreign Corrupt Practices Act (FCPA) by engaging in widespread bribery of foreign government officials in Iraq and Indonesia to obtain and retain business.  In their annual report, Innospec, disclosed that it had pled guilty to twelve count indictment in relation to illegal payments made to government officials in Iraq and Indonesia.  Innospec agreed to settle for $40.2 million with the Government Authorities to resolve all matter relating to the investigations. [ii]  This particular case involved government officials that accepted bribes from Innospec in a short time frame; the next example however shows how bribery can run undetected for a longer time frame while involving multiple levels of employees.

On March 26, 2012 the Securities and Exchange Commission charged medical device company Biomet with Foreign Bribery.  The SEC alleged that Biomet had paid bribes from 2000 to August 2008, and employees and managers at all levels were involved along with the distributors who sold Biomet’s products.  In their annual report Biomet disclosed that it had agreed to pay a monetary penalty of $17.3 million to resolve the charges and to additionally disgorge profits and pay prejudgment interest in the amount of $5.6 million.[iii]

In both cases the fraudulent activity was uncovered and later disclosed in the companies’ annual report.  However, if Forensic Accountants assisted auditors these fraudulent activities could have been detected earlier and not continued for 8 years like in the case with Biomet.  Auditors do not look to aim to detect fraud within companies; auditors check the companies’ math and applications of accounting rules.   Forensic Accountants are trained in forensic analysis, which analyzes financial documents for illegal activities.

Although there were times were the research did seem very repetitive and challenging it was a great experience.  Overall, I really enjoyed being a part of this research and I highly recommend others to conduct a research experiment of this type.

 

 

 

 


[i] “bribery.” Nolo’s Plain-English Law Dictionary. Nolo.com. N.p., n.d. Web. Aug. 2013.

[ii] “Innospec, Inc.” Innospec, Inc. N.p., n.d. Web. 17 Jul. 2013. <http://www.sec.gov/litigation/litreleases/2010/lr21454.htm>.

[iii] “SEC Charges Medical Device Company Biomet with Foreign Bribery.” SEC.gov. N.p., n.d. Web. 17 July 2013. <http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487958>.

Illegal Corporate Activities and Their Effect on Financial Statement Disclosures and How Forensic Accountants Can Help

In this exploratory study, “Illegal Corporate Activities and Their Effect on Financial Statement Disclosures and How Forensic Accountants Can Help”, we intend on analyzing Security and Exchange Commissions (S.E.C.) enforcement actions and their effect on corporations’ disclosures. Auditing standards set forth by the Public Company Accounting Oversight Board (PCAOB), AICPA auditing standards and PCAOB advisement alerts will be examined to see how they prescribed financial statement disclosure of these illegal acts to be presented.  Auditing standards and PCAOB alerts will be compared with Forensic accounting techniques that might improve the quality of financial statement transparency.

Over the past several weeks I have been able to really see the research fall into place and align it self with our overall goal.  Professor Ulinski and I have met several times and have had great communication regarding our approach to the upcoming steps of the assignment.  At first a big challenge was being able to find whether the company, that was under investigation, had disclosed of the fraudulent activities in their annual reports.

I met with Sarah Burns Feyl, Assistant University Librarian for Instruction Services, and she introduced me to many different databases and tools that enabled me to effectively search for pertinent materials.  With the help of Sarah I was able to more effectively research and collect data to support our study.  The databases that I found the most useful were ABI-Inform, Accounting & Tax Database, Business Source Premier, and the Securities and Exchange Commission Database.  The Security and Exchange Commission Database was the main database that I used; I conducted by searching for companies that the S.E.C had alleged violated the Foreign Corrupt Practices Act.  I found corruption that ranged from bribes, an act of giving money or gifts that alter behavior of the recipient, to kickbacks, is a form of negotiated bribery in which a commission is paid to the bribe-taker as a quid pro quo for services rendered.  The data interestingly showed many similarities between companies that are committing these frauds and where the fraud is being committed.  Although most of the companies that were found are U.S. based or are publicly traded on the New York Stock Exchange most of the fraudulent activity occurred over seas in foreign countries and involved bribery.  These companies did have some sort of disclosure in their financial statement; some were more specific than others (including monetary values and issue that was settled).

Once Professor Ulinski and I had an adequate amount of information we were able to put the paper together where I played an intricate role with editing and formatting the paper.  Overall I have really enjoyed this research project and would highly recommend that others learn about the different databases and if they have the opportunity to do a research assignment with a professor.

An Analysis of Illegal Corporate Activity Effects on Financial Statement Disclosure and How Forensic Accountants Can Help Improve Audit Quality

Professor Ulinski and I will be conducting a research study entitled An Analysis of Illegal Corporate Activity Effects on Financial Statement Disclosure and How Forensic Accountants Can Help Improve Audit Quality.  In this study we intend on analyzing S.E.C. enforcement actions and their effect on corporations’ disclosures. Auditing standards set forth by the Public Company Accounting Oversight Board (PCOAB), AICPA auditing standards and PCOAB advisement alerts will be examined to see how they prescribed financial statement disclosure of these illegal acts to be presented.  Auditing standards and PCOAB alerts will be compared with Forensic accounting techniques that might improve the quality of financial statement transparency.

 

This experiment falls under the category of exploratory and we will use information that we find throughout our research process to help answer our question of effect of how illegal act disclosures assisted by Forensic accounting procedures may result in better audit quality.  While conducting this project I hope to gain a better knowledge of the audit practice and develop great researching and analyzing skills that can benefit me long after the research assignment is complete.  Additionally, I feel that this experience will benefit me greatly as I am pursuing my degree in public accounting.