Crimes of Persuasion

Schemes, scams, frauds.

Accounting and Auditing to Mask Investment Scams and Penny Stock Fraud

The National Economic Research Associates (NERA) found that 55 percent of all securities class actions in the first half of 1999 were based on claims of fraudulent accounting.

There are many reasons why financial fraud investigations are the most difficult, most time-consuming and most labor intensive.

Complexity of Deceptions

Among frauds geared to inflate earnings, revenue recognition remains the recipe of choice for cooking the books.

These actions can involve side letters, rights of return, consignment sales, shipping unfinished product, the booking of fictitious sales and the sale of assets to associated companies at inflated prices to produce excessive profits

The other most common income statement fraud is the failure to properly record expenses.

On the balance sheet side, overvaluation of assets is the common denominator of financial fraud followed by improper capitalization of expenses.

Merrill Lynch warns that some of Canada’ s largest technology companies are boosting their earnings through aggressive accounting practices such as with so-called "big bath accounting", or the practice of loading write-offs into quarters where the company would record a loss in any case.

This has the effect of also boosting income in future quarters, thereby creating an impression of a brighter financial future.

In addition to these time-honored methods of inflating results, companies are also using "barter" transactions, especially among high-technology companies, where the assets received in exchange for goods and services provided are greatly overvalued.

Role of Auditors

The Exchange Act Rule 13b2-2. prohibits officers and directors from either lying to or concealing material information from auditors, who in turn, are required to bring illegal acts to the attention of senior management and the audit committee, and if remedial action is not taken, to report those acts to the SEC.

Over three years only a dozen reports have been received and in some cases the auditors themselves have been found to own stock in the company they are scrutinizing.

Auditors also have a strong relationship with the company they are auditing for they are paid by the very company they are investigating and wish to maintain their annual contract.

Consequently they rely on the directors for the correctness of the accounts and the directors, in turn, say they rely on the auditors.

It has become commonplace to sue auditors after a business failure rather than to seek to recover funds from the directors who may have been responsible for the financial collapse, as they are often the only group involved which has any remaining accessible funds.

Fraudulent Transfer Agents

Be on guard against firms that offer to "assist" shareholders with exchanging "old" certificates for "new" certificates following the merger of a company you have invested in.

These firms do not disclose that, instead of paying their fee of 15% of the value of the shares, exchange of certificates following a merger can occur with little or no cost to the shareholder, simply by contacting the official transfer agent (usually a bank) of the company directly.

The targeted shareholders, as often happens following large corporate mergers, fail to exchange their certificates in the acquired company for certificates in the resulting merged company.

Although the "old" certificates in the acquired company cannot be freely traded, the absence of a market is nothing new, and indeed, has no bearing on your equity interest by the fact you hold out-dated certificates.

In the misleading pitch you are led to believe that you must exchange your old certificates for new ones immediately, or run the risk of losing your investment in the company. This is entirely untrue.

They tend to use Federal Express to send their correspondence and provide a pre-paid package for certificates to be returned. This conveys an inappropriate sense of urgency with respect to your need to obtain new certificates.

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