Deloitte Forensic Center Study on Fraud Released

Of the 352 companies cited by the Securities and Exchange Commission for financial statement fraud from 2000 to 2007, 70 percent experienced a stock price decline, and of those, more than half (53 percent) experienced a decline of at least 50 percent, according to a new study from the Deloitte Forensic Center, titled "Ten Things About the Consequences of Financial Statement Fraud." Beyond stock price declines, companies cited for financial statement fraud by the SEC restated their financials (54 percent), delisted from primary stock exchanges (32 percent), experienced securities class action litigation cases (24 percent) or filed for Chapter 11 bankruptcy protection (18 percent).

"With economic conditions putting unprecedented pressure on companies and their employees instances of fraud are likely to increase," said Toby Bishop, director of the Deloitte Forensic Center, in a press release. "Boards of directors and audit committees with oversight responsibilities would be wise to update their fraud risk assessments where appropriate and consider reevaluating anti-fraud measures as the consequences of fraudulent activities can be very costly for companies and investors," he said.

The Deloitte Forensic Center study analyzed 61 different fraud schemes, some of which took place independently and simultaneously within some organizations, including: aiding and abetting, asset misappropriation, bribery and kickbacks, improper disclosures, manipulation of accounts receivable and revenue recognition. Findings indicated that the more fraud schemes alleged to exist at an organization, the larger were the securities litigation settlements. The average settlement for companies with six to 10 alleged fraud schemes was $312 million, compared to $777 million for companies with 11 or more schemes.

A second study from the Deloitte Forensic Center titled "Ten Things About Financial Statement Fraud, Second Edition," found that the average number of years between when fraudulent activity started and when the SEC issued its latest enforcement response, increased by 34 percent between 2005 and 2007 to 6.3 years. The first edition of "Ten Things About Financial Statement Fraud" was released in 2007, including an investigation of SEC enforcement responses to fraudulent activities from 2000-2006; the second edition includes findings from 2007. "Longer times between when frauds commission and enforcement puts companies under a cloud for longer, possibly increasing financial and reputational damage," said Frank Hydoski, national leader of the analytic and forensic technology group at Deloitte, in a press release. He led both studies for the Deloitte Forensic Center.

Of 1,403 fraud schemes identified in the latter study, two industries were responsible for two-thirds of the total fraud schemes identified: technology, media and telecommunications (37 percent) and consumer business (29 percent). SEC enforcement activity in the financial services industry doubled the proportion of enforcement releases in this industry to 13 percent in 2007 from its previous six-year average of 6 percent. Revenue recognition manipulation continues to be the largest single category of financial statement fraud schemes, representing 38 percent of the schemes identified in the study from 2000 to 2007.