Accounting Fraud

Accounting fraud occurs when individuals or companies manipulate financial statements to present a misleading picture of a company’s financial health, often to deceive investors, regulators, or other stakeholders.

This practice is illegal and can result in severe financial penalties, loss of investor confidence, and even criminal charges.

Accounting fraud undermines the integrity of financial markets, distorts company valuations, and erodes trust in the economic system.

Types of Accounting Fraud

Accounting fraud can manifest in various forms, depending on the methods used to deceive stakeholders and the purpose behind it.

Some common types include:

• Financial Statement Manipulation: This involves falsifying income, expenses, assets, or liabilities to present a misleading financial position.

Examples include inflating revenue, understating liabilities, or overstating assets to make a company appear more profitable or solvent than it actually is.

• Improper Revenue Recognition: Companies may prematurely record revenue or engage in practices like channel stuffing, where they force distributors to accept more products than they can sell.

This inflates sales figures and creates a false impression of business growth.

• Understating Expenses: By delaying or failing to record legitimate expenses, a company can falsely increase its net income.

This tactic gives the impression of higher profitability, misleading investors and stakeholders.

• Misleading Disclosures: Companies may omit crucial financial information from their public disclosures to avoid a negative impact on the stock price or to hide financial difficulties.

Providing incomplete or inaccurate information about a company’s financial state is a serious form of accounting fraud.

Regulatory Framework

The regulatory framework in the United States aims to ensure the accuracy and reliability of financial reporting.

Accounting fraud is primarily addressed through the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002.

• Sarbanes-Oxley Act (SOX): Following the high-profile Enron and WorldCom scandals, SOX was enacted to strengthen corporate governance and accountability.

It mandates stricter oversight of financial reporting, internal controls, and auditor independence, and imposes harsh penalties for those found guilty of accounting fraud.

• Securities and Exchange Commission (SEC): The SEC enforces financial reporting rules and investigates instances of accounting fraud.

It relies on both market surveillance and reports from whistleblowers to uncover fraudulent activities.

• Public Company Accounting Oversight Board (PCAOB): The PCAOB oversees the audits of public companies to promote transparency and protect investors. By ensuring that audits are conducted properly, it plays a vital role in detecting accounting irregularities.

Identifying Accounting Fraud

Identifying accounting fraud requires a combination of professional skepticism, advanced auditing techniques, and sometimes whistleblower intervention.

• Auditor Scrutiny: Independent auditors are trained to detect discrepancies in financial statements. Audit procedures such as variance analysis, forensic accounting techniques, and examining supporting documents can help identify potential fraud.
• Whistleblower Contributions: Whistleblowers are often crucial in exposing accounting fraud. Insiders aware of unethical financial practices may report their concerns to regulators. Whistleblowers are protected under laws such as the Sarbanes-Oxley Act and the Dodd-Frank Act, which also provide financial incentives for reporting fraud.
• Advanced Analytics: The use of technology and data analytics is growing in the fight against accounting fraud.

Regulators and auditors use sophisticated software to identify unusual patterns, anomalies, or inconsistencies in financial data that may indicate fraudulent activity.

At Dilendorf Law, we assist corporate insiders in addressing situations where they are asked to engage in unethical, unlawful, or questionable practices, or when they have concerns that their employer may be violating securities or other laws.

Cases of Accounting Fraud

Various cases have addressed different aspects of accounting fraud, including the responsibilities and liabilities of accountants and auditors, the sufficiency of fraud allegations, and the standards for pleading fraud claims.

• In 1650 Broadway Assoc., Inc. v. Sturm, the court held that claims for accounting malpractice and aiding and abetting fraud should not have been dismissed. The accounting firm had a duty to inform plaintiffs of questionable payments made by a partial owner of the business, as the firm was on notice about the impropriety of the loans 1650 Broadway Assoc., Inc. v. Sturm, 228 A.D.3d 1.
• In Incorporated Vil. of Freeport v. Albrecht, Viggiano, Zurich & Co., P.C., the court found that fraud and conspiracy to commit fraud claims were duplicative of accounting malpractice and breach of contract claims. The court also held that unjust enrichment claims were precluded by the existence of a valid contract governing the subject matter Incorporated Vil. of Freeport v. Albrecht, Viggiano, Zurich & Co., P.C., 226 A.D.3d 658.
• In Bullen v. CohnReznick, LLP, the court affirmed the denial of a motion to dismiss a fraud claim, finding that the plaintiffs sufficiently alleged fraud with particularity and reasonable reliance on the accountant’s misrepresentations. The court also upheld the aiding and abetting fraud claim, noting that actual knowledge of the fraud need only be pleaded generally Bullen v. CohnReznick, LLP, 194 A.D.3d 637.
• In Hoffman v RSM US LLP, the court dismissed most of the aiding and abetting fraud claim for failing to sufficiently allege substantial assistance in the fraud. The court also found that the aiding and abetting fraud claim was largely duplicative of the dismissed malpractice claim Hoffman v RSM US LLP, 169 A.D.3d 522.
• In Day v. Staples, Inc., the court held that the employee failed to demonstrate an objectively reasonable belief that the identified practices constituted shareholder fraud. Generalized allegations of billing discrepancies and accounting inaccuracies were insufficient to support a claim of accounting fraud under securities law Day v. Staples, Inc., 555 F.3d 42.
• In In re Hertz Global Holdings, Inc., the court found that the complaint did not plead a strong inference of scienter. The allegations suggested mismanagement rather than knowing or reckless involvement in fraud. The court emphasized that allegations of mismanagement alone do not support a securities fraud claim without compelling evidence of scienter In re Hertz Global Holdings, Inc., 905 F.3d 106.
• In MacLeod v. Commonwealth Edison, the court dismissed the equitable accounting claim, finding that the plaintiff failed to sufficiently plead fraud. The plaintiff did not allege that the defendants made any false statements or that she relied on such statements to her detriment MacLeod v. Commonwealth Edison, 2024 IL App (2d) 230237

 Legal Support for Victims and Whistleblowers

Dilendorf Law provides comprehensive support for both victims of accounting fraud and whistleblowers.

We assist victims in recovering financial losses caused by fraudulent activities, while also guiding whistleblowers through the reporting process, ensuring their rights are protected and they are shielded from retaliation.

We also work with whistleblowers to bring their matters to the SEC, collaborating with a former prosecutor and securities enforcement attorney.

If we accept your case, our services are offered on a contingency basis, meaning you pay only if we succeed.

For more information, reach out to Dilendorf Law Firm at (212) 457-9797 or via email info@dilendorf.com to guide you through the process and protect your interests.