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Accounting Fraud

Federal Accounting Fraud

Accounting fraud, also called bookkeeping fraud, is a serious crime that can lead to significant legal consequences, including hefty fines and imprisonment.

While all states have laws against accounting fraud, it generally falls under federal jurisdiction when it violates federal laws or regulations, affects interstate commerce, or involves a federal agency or program.

Federal Accounting Fraud
Accounting fraud refers to officers, accountants, and other employees manipulating company finances.

The federal government takes accounting fraud seriously because it can harm the economy, erode public trust, and defraud investors and taxpayers. Penalties for committing federal accounting fraud can be severe, including heavy fines, restitution, and imprisonment.

Accounting fraud generally refers to officers, accountants, and other employees manipulating company finances and records for personal gain.

Numerous laws exist to prevent accounting fraud, depending on whether a business is public or private and the type of fraud involved, but it can harm any business.

Accounting fraud can take many forms, such as an officer inflating quarterly profits to receive bonuses, an employee manipulating expenses to hide money laundering or an accountant unlawfully documenting income sources to reduce tax liability.

Many reporting laws for public companies make fraudulent accounting illegal, and for all businesses, it may lead to other statutory or common law liabilities.

Under 18 U.S. Code 1350, failure of corporate officers to certify financial reports law, officers can be criminally liable for knowingly submitting false financial data.

Officers and employees of public companies can also be triggered by other laws against crimes like racketeeringembezzlement, wire fraud, and conspiracy by intentionally misrepresenting financial information.

Rule 10-5 is a Securities and Exchange Commission (SEC) regulation prohibiting securities fraud.

What is Accounting Fraud?

Federal accounting fraud involves intentionally manipulating financial statements or accounting records to mislead stakeholders, including investors, regulators, and auditors. This type of fraud typically aims to present a false financial position of a company to achieve economic gain or avoid negative consequences.

Officers, employees, accountants, and other people involved in accounting fraud can face charges and individual claims based on negligence, fraud, breach of contract, and breach of fiduciary duties.

The availability of these causes of action differs but typically depends on the direct reliance on the information and whether the person responsible for the fraud intentionally or recklessly provided such information.

What are the Key Elements of Accounting Fraud?

Accounting fraud can take many forms and violate a variety of federal statutes, but generally speaking, to convict you of federal accounting fraud, prosecutors must prove the following essential elements:

  • Intent: You must have knowingly and intentionally committed the fraudulent act.
  • Material Misrepresentation: The false information must be significant enough to impact the stakeholders' decision-making.
  • Reliance: The stakeholders must have relied on the false information to make decisions.
  • Damages: There must be actual harm or loss resulting from the fraud.

When Is Accounting Fraud Prosecuted at the Federal Level?

Accounting fraud typically becomes a federal matter when the fraud affects interstate commerce, attempts to evade taxes, or otherwise violates federal regulations.

The federal government has jurisdiction over cases of accounting fraud that meet these criteria due to their broader impact on the national economy, public interest, and the integrity of federal programs. Here are some specific circumstances under which accounting fraud becomes a federal offense:

  • Securities and Exchange Commission (SEC) Violations: The SEC oversees and regulates the securities industry in the United States. Accounting fraud involving manipulating publicly traded companies' financial statements to deceive investors falls under federal jurisdiction as it violates the Securities Exchange Act of 1934 and other related statutes.
  • Bank Fraud: Under bank fraud statutes, accounting fraud involving federally insured banking institutions or affecting the operations of such entities is considered a federal crime.
  • Tax Fraud: Manipulating accounting records to evade federal taxes, including income and corporate tax, constitutes federal tax fraud. The Internal Revenue Code governs this, and the Internal Revenue Service (IRS) investigates these crimes.
  • Mail and Wire Fraud: If accounting fraud involves the use of mail, wire, radio, or television communications across state lines, it can be prosecuted under federal mail and wire fraud statutes.
  • Fraud Involving Federal Programs: Accounting fraud that misappropriates funds from federal programs or contracts, such as Medicare fraud or defense contractor fraud, is also a federal crime.
  • Sarbanes-Oxley Act Violations: This Act was passed in 2002 in response to major corporate and accounting scandals. It sets stricter standards for all U.S. publicly traded company boards, management, and public accounting firms. Violations of the Sarbanes-Oxley Act, e.g., falsifying financial reports or destroying records to obstruct an investigation, are federal offenses.

What Are the Common Forms of Federal Accounting Fraud?

Federal accounting fraud can take many forms. Below are some of the most common types.

Falsifying Financial Statements

One of the most common forms of accounting fraud is falsification of financial statements. This can involve overstating revenue, understating expenses, inflating assets, or hiding liabilities.

Accounting Fraud

The goal is often to make the company appear more profitable and financially stable than it actually is. For example, a company might record revenue from sales that have yet to occur or inflate the value of its inventory. The company can present a stronger financial position to investors and creditors by doing so.

Misleading Earnings Reports

Companies might manipulate their earnings reports to meet or exceed market expectations. This often involves recognizing revenue prematurely or deferring expenses to later periods. This makes the company's quarterly earnings appear better than they are, thereby boosting its stock price.

Improper Asset Valuation

Improper valuation of assets is another common form of accounting fraud. This includes inflating the value of tangible assets such as property, plant, and equipment or intangible assets like goodwill. One typical example of improper asset valuation is when a company overvalues its real estate holdings or other significant assets to enhance its balance sheet. This misrepresentation can mislead investors about the company's true financial health.

Liabilities Concealment

Hiding or understating liabilities is used to present a stronger financial position. This involves failing to record or disclose debts and obligations accurately. For instance, a company might fail to disclose pending litigation or environmental liabilities that could result in substantial future payouts, thereby giving a false impression of financial stability.

What are the Common Defenses?

While facing accounting fraud charges can be daunting, a skilled federal criminal defense attorney can implement numerous strategies to fight the charges.

Perhaps we can argue there was a lack of intent. A key element in accounting fraud is the intent to evade taxes, so we could present evidence to show you had no intent to defraud the government.

This might involve proving that any misreporting was due to negligence or misunderstanding rather than a deliberate attempt to commit fraud. 

Perhaps we can challenge the accuracy of IRS claims, which can be a viable defense in cases of alleged bookkeeping fraud. Contact our federal criminal defense law firm for more information. Eisner Gorin LLP is in Los Angeles, California.

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