Tentacles of new US fraud law likely to reach far and wide
7th February, 2008
Tentacles of new US fraud law likely to reach far and wideThe Foreign Corrupt Practices Act – primarily applicable to US companies and their subsidiaries worldwide – is ‘the next hot topic’ following in the wake of Enron-style scandals and Sarbanes-Oxley Act regulations (SOX). The new Act prohibits money payments, or ‘anything of value’, to a foreign official or employee in order to obtain or retain business, or to gain any other improper competitive advantage.
It covers, for example, bogus consulting fees, excessive gifts and travel benefits provided to government officials. (‘Anything of value’ is defined broadly.)
The law relates primarily to entities organised under US law; those that have their ‘principal place of business’ in the US; and issuers of securities in the US – including foreign companies whose stock is listed with the US’ Securities Exchange Commission.
One settlement arising from fraud in a US company in 2007 resulted in a USD 44 million fine.
As happened with SOX, the Act’s influences are likely to be felt not just among US subsidiaries worldwide but also, through national or regional legislation, throughout industrialised jurisdictions globally in time.
UHY’s specialist Forensic, Litigation & Valuations Services Group (FLVS), based in Houston, US, is primed to take on more transnational work and is well resourced with multi-skilled expertise to provide integrated investigations – what its leader, Jeff Harfenist, describes as a ‘highly specialised, response team’. Resources include an ‘eDiscovery’ electronic data system that can sift through millions of documents at a time (see panel page 7).
Worldwide it is estimated that more than 60 billion email messages are sent each day. On average each employee has between 2 and 5 GB of electronic data stored away. Ninety per cent of all documents created are stored electronically. More than 100 billion instant messaging and text messages are sent each day. Despite the enormous quantities, such data needs to be investigated to help detect fraud.
Fraud’s pressure cooker
All fraud, say Jeff, “starts with pressure�. Unrealistic expectations, bonuses, extra stock rewards and other incentives create a ‘pressure cooker’ that drives fraud.
It “starts small�, becomes habitual and, after a while, “people don’t believe what they’re doing is criminal�. They rationalise their actions by asking themselves how they will be judged “if they are the only company playing by the rules�. Fraud grows over time. “You get into it so deep you can’t grow your way out of it.�
The ‘slippery slope’ may start with delaying costs for a period, then accelerating revenue recognition, making unsupportable entries, and fabricating additional revenues.
UHY services
Services offered by UHY within the US, and transnationally through its network of firms in 66 countries, includes forensic investigations, tracing assets, and providing background information and intelligence. Local languages and knowledge of local cultures are key assets in any transnational forensic assignment.
Typically, the team will be called in by a client company when it suspects financial statement fraud from among its employees; bribery and corruption; or misappropriation of assets.
The team assesses financial statement fraud stemming from irregularities (as opposed to errors). The distinction between ‘errors’ and ‘irregularities’ is crucial. An error may be a mistake in gathering and processing data; incorrect use of estimates; and mistakes in applying accounting principles. Irregularities would be manipulating, altering or falsifying records; intentional omission of transactions or significant events; or misapplication of accounting principles with intent to deceive.
Fraud may include failing to recognise expenses when incurred; accelerating revenue recognition; and mischaracterising transactions for reporting purposes.
Potential warning signs of conditions in which fraud may exist include:
n Accounts receivable grows substantially
faster than sales
n The majority of net income comes from
one-time gains (core business may be
deteriorating)
n Operating expenses decline
sharply relative to sales
n Changes to accounting principles,
estimates and classifications (may
mask operating problems).
Theft through ‘conflicted’ sales or purchases is another area the team is called in to investigate – that is, selling to, or buying from, a customer where an employee has an undisclosed interest.
Process ‘red flags’ may include:
n Limited staff performing
multiple tasks
n Employees failing to take
vacations
n Ready access to cash
n Internal control weaknesses
n Continuing accounting
discrepancies
n Unexplained analytical anomalies
n Missing or altered documentation.
Each forensic team is recruited according to the skills and experience required on each assignment and its investigative plan. Reporting lines (including a list of people or entities not to be contacted) are drawn up and the team communicates through daily or weekly meetings or conference calls. As the investigation continues, plans are often modified as the case changes, and counsel must be available at short notice.
Contact: Jeff Harfenist
Email: jharfenist@uhy-us.com
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