Federal prosecutors sometimes bring charges arising out of what is called accounting fraud. Such cases come about when federal authorities learn of financial misdeeds by executives or high-ranking officers of corporations or governments. The case generally involves complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities.
There are many ways that accounting fraud takes place. For example, a company’s executives might anticipate that outside buyers will try to purchase the company. If the executives take steps to suppress the value of the company’s stock, the potential purchaser can buy the company for a bargain price. Stock price can be suppressed in a variety of ways: accelerate accounting of expected expenses, delay accounting of expected revenue, use off balance sheet transactions to make the company's profitability appear temporarily poorer, or report severely conservative and pessimistic estimates of future earnings. This kind of news will likely reduce share price, at least in the short run. The buyer of the company gets it at a much lower price, and sometimes the buyers then “reward” the outgoing executives with what is sometimes called a “golden parachute.” The problem, of course, is that all this is done without the average investor knowing anything about it.
Another ripe area for accounting fraud takes place when a publicly held entity is “taken private”; meaning all the stock is purchased by one person or company, and the stock is no longer traded publicly. There is often a great temptation for executives to reap tremendous monetary benefits when an entity is sold to private investors. Executives can make the entity appear to be in a bad situation, and thus reduce the sale price, which then makes the purchaser get an even better deal.
Oftentimes, such “creative accounting” is discovered in a publicly traded company. As many people know, the Securities and Exchange Commission (or SEC), along with other regulatory agencies, usually regulate publicly traded companies. Because of this, a federal criminal case involving supposed accounting fraud often begins as an SEC investigation.
At the beginning stages of an investigation into potential accounting fraud, the SEC or other regulatory agencies contacts the company’s attorneys. The Board of Directors sometimes appoints an “audit committee” to look into the issues. This audit committee needs separate lawyers, because the Board is obligated to represent the interests of the stockholders, while the company’s attorneys are often beholden to the top executives who hired them. This is when it gets tricky. The company’s inside lawyers, the audit committee’s attorneys, and all the SEC investigators will want to talk with the executives and accounting staff who potentially committed the fraud. These individuals therefore need separate counsel. Any executive or employee needs to realize that neither the company’s attorneys nor the SEC is out to help them. Executives and employees caught up in such situations need attorneys who can chart the best course of action. The goal, of course, is to either avoid getting indicted, or to avoid making any statements that can later be used as evidence against the executive or employee.
If the investigation moves far enough along, lawyers at the SEC contact federal prosecutors, who are called Assistant United States Attorneys, or “AUSA’s”. In an accounting fraud prosecution, the AUSA normally uses the mail and wire fraud statutes as the avenues for charging criminal conduct. It is more rare for federal prosecutors to use the securities fraud laws, in that these are highly complex, and often give the Defendant a greater ability to argue that his conduct did not cause harm to stockholders.
Accounting fraud cases are always very complicated. It is very normal for these matters to involve millions of pages of documentary evidence, complicated accounting issues, and difficult legal questions. Because of this complexity, lawyers who handle such matters need to be a quick study. The attorney must also be good at at identifying the need for expert testimony, locating an expert, and then working closely with an expert who possesses the specialized knowledge that a case like this often requires. It is common to hire specialists when we defend our clients, including trained professionals such as accountants, auditors, retired FBI agents and the like.
If you or a loved one is facing an accounting fraud investigation or prosecution, an attorney who is qualified to handle these complicated cases must handle the case. At Kish & Lietz, we regularly handle complex criminal matters, and we have been doing so for years. We would be glad to speak with you. Feel free to call (404) 588-3991, or contact us online.