Mitigating the Risk of Common

Fraud Schemes: Insights from SEC

Enforcement Actions
January 2021
About the Anti-Fraud Collaboration
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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

02 Executive Summary

04 Introduction

06
Contents
The Current Fraud Risk Landscape

09 Fraud Schemes and Related Issues

16 Root Causes and Fraud Factors

20 SEC Enforcement Observations

23 Key Themes and Considerations

27 Conclusion

29 Appendix A: Scope and Methodology

Appendix B: Index of Top In-Scope Fraud

31 Schemes

44 Notes

45 Acknowledgements

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Executive Summary

+ Over the years, the Securities and Exchange fraud schemes. The objective of this study is to
Commission’s (“SEC”) enforcement efforts have provide observations on higher risk areas that
focused on a wide range of alleged misconduct, are susceptible to fraud and insights into what
related but not limited to, intentional and non- companies can do to identify and mitigate these
scienter frauds, issuer reporting and disclosures, types of fraud risks more effectively.
auditor shortcomings, absent or insufficient
internal controls, deficient disclosure controls, non- + The most common types of fraud identified
GAAP measures, the Foreign Corrupt Practices Act, included: improper revenue recognition, reserves
securities offerings, insider trading, broker dealer, manipulation (e.g., inadequate reserves for known
and cyber-related misconduct. liabilities), inventory misstatement, and impairment
issues. Improper revenue recognition appeared
+ Given the unique impact of financial statement to be the most prevalent fraud scheme in almost
frauds and relevance to companies, auditors, and every year, and it was among the top two fraud
investors, the Anti-Fraud Collaboration (“AFC”) schemes from 2014 through mid-2019.
undertook a study to classify common financial
statement fraud schemes based on an analysis + There was rarely a single root cause for each
of SEC enforcement actions involving accounting matter, as each scheme typically encompassed
or auditing issues where the SEC has issued an multiple issues. This study identified a significant
Accounting and Auditing Enforcement Release number of fraud schemes that also included
(“AAER”). misleading or inaccurate financial statement
disclosures, material weaknesses in internal
+ The SEC issued a total of 531 AAERs from January controls, and unsupported journal entries.
1, 2014 through June 30, 2019. This study focused
on 204 enforcement actions related to financial + The industry sector that was most commonly
statement frauds from which we identified 140 charged by the SEC was technology services. The

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

finance, energy, manufacturing, and healthcare + Cases were brought against issuers of all sizes,
industries also experienced several accounting and in multiple jurisdictions, and across various
reporting issues. While the SEC frequently charged industries. Although there is no perfect formula for
the issuer, it often also charged employees preventing or detecting every instance of fraud, the
involved in the schemes. CFOs were the most types of fraud identified by the SEC in recent years
commonly charged employees, followed by CEOs. reveal that the most common schemes and higher
risk areas are not necessarily new. The kinds of
+ The SEC often described circumstances and cited business challenges that were frequently present
common issues—such as tone at the top, high- in enforcement cases—pressure to meet analyst
pressure environment, business challenges, and expectations, increased supplier costs, slowing
lack of adequately experienced personnel—that demand for products, and more—are exacerbated
could foster an environment or culture more during a crisis like COVID-19.
conducive to fraud. This observation suggests
a need for the board and audit committee, + As the SEC continues to reinforce its core
management, internal auditors, and external principles, drive new initiatives, and increase
auditors to be attuned to both quantitative and scrutiny of corporate compliance programs,
qualitative metrics. companies should not lose sight of the core issues
and underlying themes that are most pertinent
+ Although in many cases individuals have to them. The key to protecting companies
gone to great lengths to circumvent existing against fraud is vigilance, a continued resolve
controls, executives, companies, and financial to exercise skepticism, and attention to the
reporting ecosystem participants can learn from potential risks. Companies should remain focused
the enforcement actions how controls were on the fundamentals—controls, processes, and
circumvented and should continue to evaluate the environments that impact financial recordkeeping
strength and efficacy of internal controls, identify and decision-making—and company-specific risks
potential weaknesses, and design and implement by conducting regular risk assessments.•
improvements to internal controls.

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Introduction

BACKGROUND issues, where the SEC has issued an Accounting

and Auditing Enforcement Release (“AAER”).
Financial statement frauds impact stakeholders The objective of our SEC Enforcement Study is
across the financial reporting ecosystem and to provide observations on higher risk areas that
damage confidence in financial markets. Over the are susceptible to fraud and insights into what
years, the Securities and Exchange Commission’s companies can do to identify and mitigate these
(“SEC” or “Commission”) enforcement efforts have types of fraud risks more effectively.
focused on a wide range of alleged misconduct,
related but not limited to, intentional and non- Latham & Watkins and AlixPartners assisted
scienter frauds, issuer reporting and disclosures, the AFC with a comprehensive review of 531
auditor shortcomings, absent or insufficient internal AAERs released between January 1, 2014 and
controls, deficient disclosure controls, non-GAAP June 30, 2019 (“Review Period”). For purposes
measures, the Foreign Corrupt Practices Act, of the Review, we identified 204 AAERs related to
securities offerings, insider trading, broker dealer, financial statement fraud and/or books and records
and cyber-related misconduct. violations as “in-scope” (“Scope”). Given that the
enforcement actions highlight the nature of the
Given the unique impact of financial statement alleged misconduct with varying degrees of detail,
frauds and relevance to companies, auditors, and the identification of these violations was limited to
investors, the Anti-Fraud Collaboration (“AFC”) information that the SEC publicly disclosed, which
undertook a study (herein referred to as “SEC was primarily contained in the AAERs, SEC press
Enforcement Study” or “Review”) to classify releases, and/or related SEC complaints when
common financial statement fraud schemes applicable. We further note that the analysis relies
based on an analysis of SEC enforcement actions on the SEC’s fraud allegations, though in most of the
against companies, company employees, and cases the companies and individuals settled with the
outside auditors involving accounting or auditing SEC but did not admit or deny the frauds.

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

The Review Period and Scope were determined considerations. The information in this report
to provide an adequate timeframe for an analysis offers perspectives on the variety and prevalence
of common fraud schemes in general, taking into of recent financial reporting fraud schemes,
consideration that the frauds often occurred several observations on contributing fraud factors and
years before the enforcement actions were released. higher risk areas, insights into enforcement trends
As a result, the years cited in this report refer to and regulatory insights, and commentary on other
the years in which the AAERs were issued, and not considerations relevant to fraud deterrence and
necessarily when the frauds were perpetrated or detection.
uncovered, unless otherwise noted. See Appendix A
for more information about the Review’s scope and This report also addresses the changes to the
methodology. current business environment resulting from the
COVID-19 pandemic and its impact on fraud. The
INTENDED USE AND AUDIENCE insights are valuable to members of the financial
reporting supply chain (board of directors, audit
This report highlights the key findings about committees, financial management, internal
common frauds alleged in the enforcement auditors, and external auditors) as well as regulators,
actions and offers insights into violations related anti-fraud professionals, investors, customers,
to accounting and reporting issues and a broader extended enterprises, service organizations, and
perspective on enforcement observations and other stakeholders.•

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

The Current Fraud Risk

Landscape

A crisis such as COVID-19 can set the stage for based on fraud-related losses increased significantly
many of the factors that contribute to fraud. after the 2008 recession, according to the National
The global economic disruption has challenged Law Review.1 Therefore, organizations should
companies across industries, impacted supply update their fraud risk assessments to consider
chains, and placed enormous pressure on company the pandemic’s potential impact. Many financial
leadership, managers, employees, and business reporting fraud schemes may be more prevalent in
partners to navigate the disruption, meet or adjust the COVID-19 environment, such as:2
financial targets, manage stakeholder expectations,
or minimize the damage caused by revenue declines, + Fabrication of revenue to offset losses.
asset values, and values of intangibles.
+ Understatement of accounts receivable reserves
Past crises have proven that at any time of large- as customers delay payments.
scale disruption or stress on an economy or
industry, companies should be prepared for the + Manipulation of compliance with debt covenants.
possibility of increased fraud. For example, lawsuits

“Fraud prevention should not be an

afterthought in crisis planning and response;
it should be the starting point.”
Center for Audit Quality

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

+ Unrecognized inventory impairments. Cybersecurity is another key consideration in any

business environment, and there are additional risks
+ Over- or understated accounting estimates to meet in a mobile work environment. To support remote
projections. access for employees, companies could add servers,
adjust access controls, and institute new types of
+ Misleading plans to remain a going concern. verification, such as multifactor authentication. As
a result, “companies may need new controls related
+ Improper capitalization and amortizations of to new technology, tools, applications, or devices
costs. that employees may be using in the work-from-home
environment,” according to the Center for Audit
+ Big bath write-offs or inappropriate timing of write- Quality (“CAQ”).3
offs.
In addition to changing workforce considerations,
+ Intentional failure to disclose the pandemic’s many companies face challenging financial
impact (including impact on forecasts of future circumstances, such as increased liquidity risks
cash flows and other activities). and going concern issues that create significant
uncertainties in forward-looking projections. The
+ Passing off and falsely disclosing underlying SEC Division of Corporation Finance has provided
issues as attributed to the pandemic. guidance on disclosure and financial issues to
assist companies with accurate reporting during this
+ Overstated business interruption insurance claims period. Below is an illustrative list of considerations
that sweep in costs unrelated to the pandemic. companies can use to assess the impact of
COVID-19 and related disclosure obligations,
+ Cookie jar reserves by companies that may be several of which relate to higher risk areas that are
outperforming expectations during the pandemic. susceptible to judgment and manipulation:4

Our SEC Enforcement Study covered the period + How has COVID-19 impacted the company’s
from 2014 through mid-2019, which was a time of capital and financial resources, including its
economic growth, falling after the Great Recession overall liquidity position and outlook (e.g.,
and before the onset of the COVID-19 pandemic. material uncertainty about ongoing ability to meet
The current environment is one of continuous covenants of credit agreements, known trends and
economic uncertainty and it is difficult to predict how uncertainties related to ability to service debt or
or when circumstances might change. Therefore, other financial obligations)?
understanding changes and implications of the
current fraud risk landscape is essential in identifying + How does the company expect COVID-19 to
disruptors, external stressors, and emerging risk areas, affect assets on your balance sheet and its ability
and mitigating their potential impact. to account for those assets (e.g., judgments in
determining fair-value of assets)?
Coupled with these economic challenges is the
need to adapt controls, oversight, and auditing + Does the company anticipate any material
in a virtual world. In response to the crisis, many impairments, increases in allowances for credit
companies have adopted new ways of working— losses, restructuring charges, other expenses, or
from fully remote workforces to hybrid models—that changes in accounting judgments that have had or
may change operating procedures, segregation of are reasonably likely to have a material impact on
duties, and associated internal controls, which can its financial statements?
leave companies vulnerable to emerging fraud risks.
Some vulnerabilities may arise simply due to limited + How have COVID-19-related circumstances such
accessibility to physical accounting records and as remote work arrangements adversely affected
inventory, while other factors such as an increased the company’s ability to maintain operations,
sense of urgency or pressure could result in including financial reporting systems, internal
noncompliance with policies and procedures or lack control over financial reporting, and disclosure
of adherence to internal controls. controls and procedures?

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Despite the various types of issues with which

companies are met during the pandemic, the SEC
urges companies to keep investors informed about
“[The Commission] is very
how they assess, plan for, and take steps to address
the effects of the pandemic. More importantly,
aware of the challenges
companies should avoid being tempted to use
the pandemic to cover up past accounting issues
that companies and
or performance problems. Matt Jacques, Chief
Accountant of the SEC Division of Enforcement,
individuals are facing
emphasized the importance of accurate disclosures
and that “companies should document how they
during this time with
arrived at key estimates and other judgments that
are some of the most complex areas of accounting,
regard to financial
including revenue, fair value and impairments,
hedging, and leasing. Companies should [also]
reporting, accounting, and
tell investors how they changed their accounting
policies or assumptions,” according to a Bloomberg
auditing. We are also very
Tax article.5 much aware of the history
Finally, as a reflection of the pandemic’s impact on
fraud, the SEC Office of Market Intelligence received
of economic downturns
approximately 16,000 tips, complaints, and referrals;
and the Division of Enforcement opened more than
and how these situations
150 COVID-19 related inquiries and investigations,
and recommended several COVID-19 related fraud
can reveal past errors or
actions to the Commission from mid-March to
September 30, 2020.6•
frauds.”
SEC Division of Enforcement

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Fraud Schemes and

Related Issues

This section highlights key findings from the SEC COMMON FRAUD SCHEMES
enforcement actions about common financial
statement fraud schemes and related accounting Several types of frauds appeared frequently in the
and reporting issues. For a broader perspective enforcement actions. Unsurprisingly, fraud schemes
on enforcement considerations and details on the to increase income—either through revenue
breakdown of enforcement actions analyzed, see recognition or expense manipulation—occurred
SEC Enforcement Observations on page 20. most frequently. Other commonly manipulated
areas included reserves and inventory, along with
We analyzed 531 enforcement actions issued impairments. Below is an analysis of the key issues
from January 1, 2014 through June 30, 2019 to identified and examples of recent enforcement
classify common fraud schemes. We considered actions that illustrate these types of schemes.
204 enforcement actions, or 38 percent of the See Appendix B for a listing of top in-scope fraud
total population, that related to financial statement schemes.
frauds and/or books and records violations as
“in-scope.” See Appendix A for definitions and In addition to the top fraud schemes, we identified
additional information about the Review’s scope and several other fraudulent schemes and misconduct.
methodology. The range of issues related to non-GAAP measures,
misappropriation of assets and company funds,
For purposes of the analysis, we grouped together concealment of assets, related party transactions,
enforcement actions that were part of the business combinations and divestitures, material
same underlying fraud schemes or charges and omission of information and disclosures, and
considered them part of the same “family.” Based on deceiving and/or misleading auditors.
this designation, we identified 140 fraud schemes
from the 204 enforcement actions. This in-scope
population formed the basis of our analysis.

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Classification of Fraud
Examples of Key Elements
Schemes

Improper revenue recognition attributable to timing, valuation, fictitious

Revenue related issues
revenues, and percentage of completion.

Manipulation or improper reduction of reserves, timing of reserves and

of recording of expenses, manipulation or misclassification of expenses,
Reserves related issues
improperly calculated rebate/expense accruals, and failure to recognize
liabilities.

Inventory misstatement including misstating cost of sales and misstating or

Inventory related issues
overstating inventory.

Timing of impairments, including loan impairment deferral, failure to record

Impairment related issues
asset impairment, faulty valuations, and improper reserves manipulation.

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Improper revenue recognition

ASC 606: REVENUE FROM CONTRACTS
The greatest number of fraud schemes identified in WITH CUSTOMERS9
the Review related to improper revenue recognition,
with 60 instances in 81 enforcement actions, Considering the emphasis on assessing
or 40 percent of the in-scope population. These and accurately reporting revenue from the
schemes often included falsifying customers or their financial reporting supply chain perspective,
contracts; accelerating revenue in a current period organizations should consider the potential
even though all recognition criteria were not met; for changing fraud risks related to the
recognizing revenue when inventory was shipped Financial Accounting Standards Board
on consignment; failing to account for extended (“FASB”) Accounting Standards Update 2020-
terms, concession, or discount side-agreements; 05, Revenue from Contracts with Customers
percentage of completion; and engaging in channel (Topic 606). As is the case with any recently
stuffing—sending customers more goods than they enacted standard, companies are wise to
can be expected to sell to inflate sales figures—and consider new fraud risks that might occur as
failing to properly account for returns. guidance is being implemented. Risks may
result from lack of familiarity with the new
This finding appears to be consistent with a standards as well as from any opportunities
Committee of Sponsoring Organization (“COSO”) for employees to manipulate the new rules in
study of fraudulent financial reporting cases ways that organizations have not yet identified
enforced by the SEC between January 1998 and or adopted.10
December 2007, in which 61 percent of the cases
related to improper revenue recognition.7 Further,
revenue recognition remains a common issuer
reporting and disclosure issue today. In the SEC recorded on the company’s books. Other alleged
Division of Enforcement 2020 Annual Report, many violations included (1) improperly classifying
of the notable cases included some form of alleged costs of goods sold as research and development
improper revenue recognition, such as the inflation, expenses; (2) not capitalizing labor and overhead
overstatement, or creation of fictitious revenues to costs in inventory costs; (3) recognizing revenues
mislead auditors, analysts, and investors alike. While when products were shipped rather than when
the drivers and opportunities for fraud may change, they were delivered; and (4) understating accruals
the need for companies to identify and address risks for product returns. The order also cited an alleged
in complex revenue recognition areas is an ongoing failure to implement sufficient controls to avoid
imperative. misclassifying sales discounts as marketing
expenses and to prevent overstatement of
CASE HIGHLIGHT revenues and gross profits.

The result: In late 2013, a financial restatement

Improper revenue recognition case study: OCZ decreased OCZ’s previously reported revenues by
Technology Group, Inc.8 more than $100 million from FY 2011 Q2 through
FY 2013 Q1, resulting in a significant reduction in
The case: The SEC charged OCZ Technology previously reported revenues and gross profits.
Group, Inc. (“OCZ”) with materially inflating The company subsequently filed for bankruptcy
revenues and gross margins between 2010 protection, liquidated assets, and ceased
and 2012. The SEC alleged that OCZ’s CEO operations. The company CEO was ultimately
mischaracterized sales discounts as marketing charged with accounting fraud, and the CFO with
expenses and ordered the creation of false accounting, disclosure, and internal accounting
documents to conceal the fraud; shipped more controls failures. The company’s auditor was
goods than the company’s largest customer could suspended from appearing and practicing before
be expected to sell; and withheld information on the SEC as an accountant for violating auditing
significant product returns from OCZ’s finance standards.
department and auditor so that they were not

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Reserves manipulation inventory on the balance sheet to manage financial

metrics or overall results. This appears to have
The second most common type of fraud scheme been accomplished in a number of ways, including
identified involved reserves related issues, with overcapitalizing costs into inventory and inflating the
34 instances in 57 enforcement actions, or 28 value; recording fake inventory; timing of recording
percent of the in-scope population. The SEC brought inventory reserves; and failing to record losses when
several cases in which a company manipulated cost exceeds market value.
its expenses, including manipulating items on the
income statement (e.g., moving costs out of COGS
to inflate margins), improperly calculated accruals, CASE HIGHLIGHT
and improper reduction or manipulation of reserves
(e.g., accounts receivable, warranties, and rebates). Inventory misstatement case study: Stein Mart,
Inc.12

CASE HIGHLIGHT The case: The SEC alleged that Stein Mart,
Inc. (“Stein Mart”), from at least 2010 through
Reserves manipulation case study: Diamond Foods, November 2012, did not properly take price
Inc.11 discounts or markdowns into account in valuing
inventory. One of Stein Mart’s markdowns,
The case: In the wake of a spike in walnut prices according to the SEC, was a permanent price
in 2010, Diamond Foods, Inc. (“Diamond Foods”) reduction that was marketed as a temporary
faced a hit to net income at the same time it was reduction. The SEC alleged that Stein Mart
experiencing pressure to meet or exceed analysts’ improperly valued the inventory on permanent
expectations. The SEC alleged that the company reduction by writing down the inventory values
CEO characterized some additional payments to when the product was sold rather than when the
walnut growers as special payments that were markdown was taken, thereby overstating inventory
not reported in year-end financial statements in values.
FY 2010 and FY 2011. Instead, the payments were
designated as advances on crops that had not yet The result: The SEC alleged that Stein Mart
been delivered and recorded on the balance sheet. materially overstated its pretax income by nearly 30
The SEC alleged that by delaying the reporting percent in FY 2012 Q1. In 2013, Stein Mart restated
of these costs, Diamond Foods reduced its its financial results for FY 2012 Q1, all reporting
current expenses and was able to exceed analyst periods in FY 2011, and its annual reporting period
estimates. in FY 2010 primarily because of this accounting
error. Stein Mart consented to an SEC cease-and-
The result: When the company restated annual desist order in 2015.
and periodic financial statements beginning with
the quarter ended January 31, 2010 and continued Loan impairment deferral
through the year ended July 31, 2011, reported
earnings fell by $10.5 million for FY 2010 and $23.6 There were also several fraud schemes involving
million for FY 2011. The SEC brought cease-and- loan impairments and allowances, with 15 instances
desist proceedings and accepted the company’s in 17 enforcement actions, or 8 percent of the in-
settlement offer. scope population. These cases involved instances
where creditors failed to recognize loan impairments
Inventory misstatement and their associated reserve allowances or
improperly reclassified loans to specific categories
The misstatement and manipulation of inventory that do not require review for impairment or other
were among the Review’s top in-scope fraud issues. Both impairment reserve amounts and
schemes, with 15 instances in 24 enforcement timing of recognition appear to be issues facing
actions, or 12 percent of the in-scope population. creditors.
Based on the Review, the misstatements related
to inventory typically aligned with increasing

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

ASC 326: FINANCIAL INSTRUMENTS—CREDIT LOSSES13

FASB Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments, established new rules for determining the allowance for current
expected credit losses (“CECL”). One significant change is a switch from recognizing probable credit losses
when they were incurred to recognizing them when the loan is originated based on an estimate of lifetime
credit losses. The guidance applies to a wide range of companies, including those that hold loans, debt
securities, receivables, or off-balance-sheet credit exposures. As the new rules require more judgment from
senior management, companies should consider potential fraud risks as they implement the new standard.

RELATED ACCOUNTING AND REPORTING

CASE HIGHLIGHT ISSUES

Loan impairment deferral case study: Santander In addition to the conduct described above, some of
Consumer USA Holdings Inc.14 the schemes also included manipulating disclosures
or books and records, creating unsupported journal
The case: The SEC alleged that Santander entries, or exploiting internal control gaps. This
Consumer USA Holdings Inc. (“SCUSA”) did not section discusses some of the specific conduct
properly calculate and report its incurred credit described by the SEC in the fraud cases analyzed.
loss allowance beginning before its initial public
offering in January 2014 and through most of Misleading or inaccurate financial statement
2016. The company purchased and securitized disclosures
retail installment contracts (“RICs”) associated
with car loans. The bulk of the RICs it bought Misleading or inaccurate disclosures are a common
were subprime, so they carried a higher credit risk symptom of financial statement frauds. The Review
and a greater likelihood of default than do loans identified 78 instances of false or inaccurate
issued to borrowers with higher credit scores. financial statement disclosures. The disclosure
The SEC alleged that the company grouped issues related to financial reporting typically may
troubled debt restructuring loans (“TDRs”) with signal how a fraud might be carried out or indicate a
other loan assets and evaluated the whole result of fraud’s existence.
group for impairment in violation of GAAP, which
requires that TDRs be evaluated separately using In the current environment, disclosures have
a discounted cash flow. The SEC also alleged become more important than ever before. The
that the company used an incorrect discount SEC Division of Corporate Finance has warned
rate and incorrectly calculated its accretion. As companies that are grappling with underlying
a result, the company understated its credit loss issues against “big bath” disclosures and attributing
allowance and did not appropriately recognize problems entirely to the impact of COVID-19.
related credit losses. Disclosures continue to be an area on which all
members of the financial reporting ecosystem
The result: SCUSA restated its financial should be focused. This includes evaluating whether
statements twice during the period when the COVID-19 related disclosures are accurate when
allegations occurred. The SEC charged that tied to poor performance, impairment, or failing to
SCUSA violated the reporting, books and records, meet expectations and not an effort to mask other
and internal accounting controls provisions of problems, including fraud.
the federal securities laws. The SEC undertook
cease-and-desist proceedings and accepted the
company’s offer of settlement.

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Material weakness in internal controls

“With very few exceptions,
Public companies are required to maintain a system
of internal accounting controls sufficient to prepare most of the major
timely and accurate financial statements. However,
outright management override of controls poses fraud cases in the
a significant risk and is something the AICPA has
called the “Achilles’ heel of fraud prevention.”15 One past 50 years that had
key reason is that because management designs
and implements a company’s internal controls, it is catastrophic results for
also in a unique position to bypass those controls.
Fraud frequently involves the circumvention of the organization were
internal controls because companies tended to
allow, encourage, or take advantage of internal perpetrated by senior
control weaknesses—or lack of controls in the first
place. members of management
The Review identified 44 instances in which the circumventing or
issuer failed to maintain an effective system of
internal accounting controls. Examples of internal overriding seemingly
control weaknesses cited include inadequate
segregation of duties, financial statements prepared sound systems of internal
by employees with insufficient training or accounting
knowledge, and failure to reconcile significant control.”
account balances. The enforcement actions can
offer insights into how companies can mitigate American Institute of
these issues, because they spotlight weaknesses Certified Public Accountants
in the design and implementation or operating
effectiveness of controls.

For example, OCZ’s CEO was charged with failing to

implement controls that would have prevented the
misclassification of sales discounts as marketing
expenses and from overstating revenues and gross
profits. In another instance, Orthofix International

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 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

N.V. was charged with having inadequate internal In 11 instances, the SEC specifically referenced
controls over its distributor revenue recognition (see respondents using unsupported journal entries to
Key Themes and Considerations on page 23). perpetrate the frauds. Improper journal entries can be
found in a wide variety of frauds, including schemes
Unsupported journal entries with inventory inflation or fabricated purchases.
Unsupported journal entries are often also associated
Public companies are required by federal securities with management override of internal controls, such
laws to maintain accurate books and records. as when management or accounting personnel
When there is a financial statement fraud, there manipulate entries or create phony transactions to
are necessarily inaccurate books and records. inflate or postpone revenue or expenses.•

COSO INTERNAL CONTROL—INTEGRATED FRAMEWORK SETS FORTH FIVE INTEGRATED

COMPONENTS OF INTERNAL CONTROL:

+ Control environment. The standards, + Management or employees cannot effectively

processes, and structures that govern how and timely prevent or detect material
internal controls are implemented across the misstatements, due to problems with the
organization. design or operation of one or more controls.

+ Risk assessment. The process used to identify, + Controls are not used effectively to prevent
assess, and manage risks that pose threats incentives, pressures, and opportunities for
to the organization and will prevent it from fraud.
reaching its goals.
+ Controls do not reflect the company’s unique
+ Control activities. A wide range of preventive circumstances.
or detective measures that mitigate risks
and enable the organization to achieve its + Controls are not designed and implemented
objectives. to allow for making complex accounting
judgments in accordance with GAAP.
+ Information and communication. The gathering
and sharing of knowledge that reinforce the + Controls do not function as intended due to
value of control objectives, among others. fraud, collusion, or management override.

+ Monitoring activities. Ongoing evaluations + The company fails to reinforce a code of

to determine if the five elements of internal conduct that clearly discourages—and
controls are functioning. stipulates the consequences for—behavior that
could lead to fraud or circumvention of internal
Some contributing factors to control deficiencies controls.
include the following:
+ The company fails to establish standards of
+ Directors and management do not use conduct and to train employees on ethical
appropriate tone at the top to articulate and behaviors and how to address unethical
demonstrate support for effective controls. behaviors.

15
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Root Causes and Fraud

Factors

The Review provides an opportunity to assess by senior management—reflects the importance

potential root causes for fraud, to be mindful of of integrity and ethical values and a commitment
contributing factors, and take proactive steps— to reliable financial reporting.”16 In addition, as
particularly during this unique COVID-influenced organizations shift to remote work, “leadership and
time-period—to prevent future frauds. The department heads should make an active effort to
enforcement actions issued by the SEC are helpful maintain communication with their workforce.”17
in this regard because of their descriptions of the
facts and circumstances that potentially contributed A strong corporate and compliance culture will
to the fraud schemes. The enforcement actions encourage ethical behavior and deter wrongdoing.
described high-pressure environments, a poor tone In a 2014 speech addressing the Commission’s
at the top, and other factors that appeared across enforcement considerations, former SEC Chair, Mary
cases and provide lessons for boards, management, Jo White, stated that the SEC charges individuals
and auditors in evaluating fraud risks. in most of its cases, focusing first on those closest
to the wrongdoing, then determining from there
TONE FROM ABOVE who else should be charged, including whether to
charge the company. Mary Jo White emphasized
Through their actions and communications, leaders that a company “can only act through its employees
articulate and exemplify a certain set of ethical and and if an enforcement program is to have a strong
behavioral standards and expectations. They also— deterrent effect, it is critical that responsible
intentionally or not—foster a culture that permeates individuals be charged, as high up as the evidence
the organization. Leaders who set and follow ethical takes us.”18
standards will have a positive influence on the
standards their employees follow. The CAQ notes According to the Association of Certified Fraud
that “controls designed to generate reliable financial Examiners (“ACFE”), “if upper management appears
reporting are more likely to succeed if the company’s unconcerned with ethics and focuses solely on
culture—including the ‘tone-at-the-top’ established the bottom line, employees will be more prone to

16
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

commit fraud because they feel that ethical conduct + Failing to provide ethics training or to articulate the
is not a focus or priority within the organization.”19 company’s expectations and standards in a code
The ACFE also notes that problematic tone at the of conduct; to punish those who lack integrity; or
top can manifest itself in many ways, including the to support and recognize those who demonstrate
following: integrity.

+ Condoning an acceptance or culture of lax Increasingly, companies are also recognizing the
procedures (e.g., corner cutting) or disregard of importance of middle managers in promoting a
controls. culture of compliance and preventing fraud. As
middle managers are the closest to a company’s
+ Focusing on revenues and profits at all cost. daily operations, these employees play a critical role
in overseeing and enhancing a company’s corporate
+ Violating laws or regulations or pressuring culture and values by filtering down the right ethical
employees to do so. tone to the rest of the employees within a company.
Tone in the middle can have a significant impact on
+ Tying compensation or bonuses to unrealistic a company’s fraud risk.
goals that may incentivize employees to engage in
misconduct. HIGH-PRESSURE ENVIRONMENT

+ Creating a workplace that is not perceived by The fraud triangle, which illustrates the factors
employees as a meritocracy, but rather as a place necessary for fraud to occur, is formed by
where some workers are unfairly favored. This opportunity, rationalization, and pressure. People
can lead to grievances that enable workers to often perceive pressure as an individual concern,
rationalize fraud. relating to someone with financial concerns or other
problems that lead them to rationalize unethical
+ Illegally discriminating against employees or behavior. However, that pressure may also be
engaging in sexual harassment or other abusive caused by the work environment in a department or
behavior. an entire organization. A high-pressure environment
may demand that employees meet unrealistic goals,
+ Retaliating against employees who report fraud or for example, or may cause employees to feel their
other misconduct. jobs are threatened if they do not circumvent certain
standards or procedures.

“The board of directors and senior

management establish the tone at the top
regarding the importance of internal control,
including expected standards of conduct.
Management reinforces expectations at
various levels of the organization.”
COSO Internal Control—Integrated Framework

17
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

In a high-pressure environment where employees

perceive that delivering bad news is unacceptable, CASE HIGHLIGHT
they may rationalize that it is expected, or implicitly
encouraged, to make numbers or take whatever Manipulation of financial results case study:
steps they need to meet earnings projections and Computer Sciences Corporation20
other expectations. Even if management or the
board believe they have modeled ethical behavior The case: The SEC alleged that Computer
themselves, an unnecessarily or unhealthy high- Sciences Corporation (“CSC”) engaged in a wide-
pressure environment can lead to intentional or ranging accounting and disclosure fraud that
inadvertent failures of control activities and can be a resulted in a material overstatement of earnings
potential contributor to fraud. and concealed significant problems with its
largest contract from investors from 2009 to
Actions that can counter-balance the risk from a 2011. The company CEO was accused of using
high-pressure environment include, among other improper accounting models for the company’s
things, greater transparency and more training. largest, multi-billion dollar contract with the United
Pressure to skirt the rules is potentially reduced in Kingdom’s National Health Service (“NHS”) and,
an environment where targets and achievements with the CFO, failed to make required disclosures
are clearly reported, so that observers from the top and made misleading statements to investors
or other parts of the organization have a chance to about the NHS contract.
understand how they are or can be achieved.
In 2009, CSC’s Finance Director reported to his
Another approach is to offer employees training colleagues that CSC would fall more than $1 billion
on the organization’s ethical expectations and short of the original $5.4 billion revenue target for the
rewarding those who follow the rules. Employees contract, the NHS account had “no basis” for holding
in a high-pressure environment may assume that its operating income and revenue forecasts, and
the departures from ethical behaviors are the that CSC’s accounting model was “non-sustainable.”
norm—or implicitly condoned by management. CSC finance personnel prepared an accounting
Training can clarify the organization’s standards and model that reflected the contract was no longer
expectations as well as compliance requirements, profitable compared to the previously forecasted 16
and rewards can demonstrate that meeting them percent profit margin. CSC’s Finance Director did not
is important to company leadership. Considering immediately communicate this to the CEO or CFO,
ethical expectations and the tone that managers set and led a fraudulent “gap closing” exercise in which
in performance evaluations can also reinforce the his team manipulated assumptions to conceal the
importance of adherence to rules and guidelines. significant profit reductions.

In addition, executive leaders should consider Several CSC finance personnel in the United
whether the pressure being seen in some or all Kingdom, Australia, and Denmark were allegedly
levels of an organization is a result of the unrealistic complicit in the schemes. Their actions included
expectations or deadlines that they are setting. using a fraudulent accounting model with
While striving to meet analysts’ estimates does not fabricated assumptions to avoid earnings declines;
always lead to misconduct, for example, demands overstating earnings using “cookie jar” reserves
that employees meet unfeasible objectives to meet and failing to record expenses properly; and
those targets may cause employees to succumb manipulating accounting to overstate earnings.
to the pressure and do something they know is CSC’s Nordic region engaged in this misconduct
inappropriate or not what they would otherwise to improve operating income in a region that was
choose to do. Finally, company leaders should struggling to achieve budgets set by management
also address bad news, such as failure to meet in the US. In addition, the SEC charged the company
analyst expectations, and what positive steps the for misleading investors and failing to make
organization will take to address it. It is especially required disclosures.
important now for leaders to not knowingly or
unknowingly squash bad news in a remote work The result: The company paid a $190 million
environment. penalty to settle charges that its executives

18
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

manipulated financial results and that it concealed often associated with improper revenue recognition.
significant problems with the company’s largest COSO recommended that “close examination of
and most high-profile contract. Among the eight revenue accounting and related fraud techniques
former executives charged, its CEO agreed to repay is needed to better understand how revenue
the company $3.7 million in compensation under recognition is used to distort financial statement
the clawback provision of the Sarbanes-Oxley Act information.” Inexperienced staff may not have
and to pay a $750,000 penalty. The former CFO sufficient knowledge of certain components of
agreed to repay $369,100 in compensation and pay their functions or tasks. As a result, they may not
a $175,000 penalty. recognize inadequate supporting documentation,
noncompliance with policies or revisions in
LACK OF PERSONNEL WITH SUFFICIENT standards, or irregularities in journal entries. The
ACCOUNTING EXPERIENCE OR TRAINING need for adequate expertise can also increase when
applying complex accounting rules that require more
Experienced and well-trained accounting staff judgment—such as conducting a full analysis of
are often better equipped to identify and address non-standard contracts—by sufficiently experienced
fraud than those who have less expertise. A new accounting staff.
or inexperienced person may also be more likely
to accept excuses or rationalizations from those As the landscape of accounting rules and the ways
attempting to perpetrate fraud because they are in which companies operate are everchanging, there
unaware of any reason not to trust the superior who may be a continual need to refresh and update your
is asking them to bend a rule or make an exception. employees’ skill sets. Companies should strive to
This is a risk enhanced during challenging economic keep employees informed and up to date on best
times where companies may look to cut costs by practices, new guidance, and potential emerging
hiring newer, lower-salaried employees, instead of risks. While many companies have transitioned
retaining costlier and more experienced employees. to a fully remote or hybrid work model in the
current environment, it has become even more
New or complex accounting standards can also critical to timely equip employees with appropriate
complicate the situation. As noted in the COSO knowledge and training on systems, processes, and
study of fraudulent financial reporting, fraud was technologies to adopt new accounting guidance.•

19
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement
Observations

Based on an accumulation of historical data top 10 industry sectors, and issuer size by market
released by the SEC, we observed that the capitalization.
Commission’s enforcement of core issues has
remained consistent throughout the Review ENFORCEMENT ACTIONS BY RESPONDENT
Period. This section provides a holistic view of TYPE
the enforcement actions based on the individuals
involved and their roles and the types of companies When financial statement fraud occurs, the SEC
represented. We summarized the information using frequently charges the issuer/company. Over the past
the following categories: top five respondent types, few years, the SEC has emphasized the importance

20
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

REGULATORY INSIGHT

SEC Division of Enforcement focus on individual accountability. From 2014 through 2020, the SEC Division
of Enforcement has highlighted individual accountability as a key pillar in its enforcement program by
pursuing charges against individuals for misconduct, including executives at all levels of the corporate
hierarchy, such as CEOs, CFOs, other high-ranking executives, accountants, and gatekeepers. In its 2018
Annual Report, the Commission stated that “institutions act only through their employees, and holding
culpable individuals responsible for wrongdoing is essential to achieving [the Commission’s] goals for
general and specific deterrence and protecting investors by removing bad actors from our markets.”21

of individual accountability and frequently charges recognition issues to address. Technology services
company employees, along with the company or companies were most often cited in cases for which
independently for their conduct. Company CFOs are the fraud included premature recognition of revenue
the most commonly charged employees, followed when all the recognition criteria were not met, such
by CEOs, and other employees—such as chief as when there was still a right of return. Finance
accounting officers, other accounting department and energy companies most frequently encountered
employees, and sales personnel. We also noted that reserves and impairment related issues. And as
respondents cited in the enforcement actions could with many other industries, manufacturing and
have more than one role, which would result in more healthcare companies were often cited with revenue
than one designation illustrated herein. recognition and inventory misstatement frauds.

ENFORCEMENT ACTIONS BY ISSUER ENFORCEMENT ACTIONS BY ISSUER SIZE

INDUSTRY
The Review identified 79 enforcement actions,
The industry sector that was most commonly or 39 percent of the in-scope population, that
charged by the SEC was technology services. The cited companies with less than $250 million in
finance, energy, manufacturing, and healthcare market capitalization as a respondent. The next
industries also experienced several accounting and tier of small-cap companies charged represented
reporting issues. We noted parallels between certain 44 enforcement actions, or 22 percent of the in-
industry sectors and fraud schemes identified in scope population, followed by mid- and large-cap
our analysis. For example, technology services companies, which each represented 11 percent of
companies often appeared to have complex revenue the in-scope population.22

21
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

The risks of a material weakness of internal control Another Audit Analytics study noted that non-
over financial reporting (“ICFR”) and financial accelerated US filers accounted for 61 percent
restatement may be higher among smaller of the total financial restatements between 2003
companies. According to an Audit Analytics study, and 2019. The top restatement issues included
39 percent of non-accelerated US filers—companies revenue recognition, liabilities, payables, reserves,
with market capitalization of less than $75 million— and accrual estimate failures.25 Though not directly
disclosed material weaknesses in ICFR in 2019, linked to financial statement fraud and not in all
as required by the Sarbanes-Oxley Act Section cases, issues such as material weaknesses in
404.23 One of the primary reasons contributing to internal controls and restatements can be potential
the existence of material weaknesses disclosed indicators of fraud.•
by management was staffing, which included the
competency and training of accounting staff, lack of
segregation of duties, and design of controls.24

22
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Key Themes and

Considerations

Issuers and individuals that manipulated certain and procedures.26 As an important starting point,
financial accounts, including revenue and expenses, management must know its culture in order to
often did so to meet analyst estimates or year-end effectively manage, preserve, and enhance it.
financial metrics. This observation suggests a need Management needs to know what the key drivers
for the board and audit committee, management, of the company’s culture are to understand what
internal auditors, and external auditors to be attuned the culture is and how it might change over time,
to quantitative and qualitative metrics, including according to Jay Clayton.
the company’s culture and tone at the top (and
middle). Culpable employees also tend to try to There are many methods to communicating,
conceal their conduct, so qualitative assessments monitoring, and reinforcing cultural objectives—
of management’s integrity should play a critical role compliance programs, policies and procedures,
in identifying audit and misstatement risks. This training, and personnel decisions (including
section discusses some of the qualitative factors evaluations and compensation), and so on, all
companies can consider to potentially identify of which are important. Culture can serve a “gap
yellow and red flags sooner, and more effectively filling” function when individuals on the front lines
mitigate fraud risks overall. encounter circumstances not contemplated by
their policies and procedures and need to make
CULTURE AND SKEPTICISM decisions. The actions companies take in such
scenarios reflect a great deal about the company’s
The SEC has demonstrated its dedication to culture. When employees make mistakes and
observing culture in its enforcement priorities diverge from cultural expectations, compliance
for many years. In a 2018 speech addressing mandates, or legal requirements, companies should
the importance of culture, former SEC Chairman, consider the following questions:
Jay Clayton, emphasized that “culture is not
optional” even at companies with the most + Do the controls make clear that lying is
comprehensive compliance programs and policies unacceptable?

23
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

+ Did the remediation efforts, in addition to control books and records, and internal accounting
enhancements, send an appropriate and lasting controls provisions of the federal securities
cultural message? laws, the SEC also brought charges against the
company’s CFO, the CFO, President, and Vice
+ Were the offending parties dismissed or otherwise President of Global Sales and Development of the
meaningfully sanctioned? company’s largest segment. The SEC accepted
offers of settlement from the company and the
Culture also extends beyond what is said by individuals charged.
management to its employees and is demonstrated
by the actions that are taken within the organization “Each member of the financial reporting supply chain
as well as externally with customers, suppliers, plays a role in deterring and detecting fraud and
and regulators. Companies should be diligent in misconduct,” according to the CAQ.28 Professional
effectively implementing and enhancing a positive, skepticism is a requirement for auditors, but
ethical culture in effort to mitigate fraud risk and skepticism is a valuable and critical tool for various
deter misconduct. other stakeholders, including the board, audit
committee, management, internal auditors, and all
other employees whose actions and questioning
CASE HIGHLIGHT mindset can play a role in detecting fraud.29
Skepticism requires a level of independent thinking
Culture case study: Orthofix International N.V.27 that enables corporate employees to double-check
or challenge information as appropriate.
The case: The SEC charged Orthofix International
N.V. (“Orthofix”) with overstating its distributor In a 2016 speech addressing auditors’ need to
revenue and operating income in annual and exercise professional skepticism, Andrew Ceresney,
quarterly reports and earnings releases filed former Director of the SEC Division of Enforcement,
with the Commission from at least 2011 to mid- said that, “particularly where there are red flags,
2013. Most of the alleged misconduct occurred representations from management will not be
at its largest segment and included entering into sufficient evidential matter to support an audit
contingent sales and recognizing revenue when finding and we have emphasized the need in our
a product was shipped despite contingencies actions for more substantiation.”30 Even though
that had not yet been met. In other instances, skepticism is not required for employees other
the company treated some price discounts as than for external auditors, companies can more
expenses instead of reductions to revenues and effectively mitigate fraud risks by encouraging
improperly recognized revenue when the purchaser an appropriate level of skepticism throughout the
was able to return or exchange the product. The financial reporting process. Skepticism includes
SEC alleged that improper revenue recognition also maintaining a questioning mindset and being willing
occurred because of extra-contractual agreements to challenge and verify information—even if it is
used at its Brazilian subsidiary. The SEC also cited received from a supervisor, upper management, or
inadequate internal accounting controls over its an apparently reliable source. All members of the
distributor revenue recognition as well as a culture financial reporting ecosystem must also be willing
of setting aggressive internal sales targets and to acknowledge their biases and challenge their
imposing pressure upon its sales personnel to meet own assumptions and conclusions to assess their
those sales targets. veracity.

The result: Orthofix agreed to pay $14 million to EXECUTIVE AND BOARD OVERSIGHT
settle charges. It restated its financial results for
FY 2013 Q1, all reporting periods in FY 2012 and The SEC frequently charged issuers and key
FY 2011, and its annual reporting period in FY executives, including CEOs, CFOs, other high-ranking
2010. It reported that it had overstated net sales executives, and accounting department employees.
for FY 2011 by 6 percent and operating income Considering the extent to which many of the in-scope
by more than 430 percent. In addition to charging fraud schemes were perpetrated by management, one
that the company violated the antifraud, reporting, cannot understate the importance of executive and

24
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

board oversight in assessing management’s integrity reward behavior that can lead to fraudulent or
and mitigating a company’s fraud risks. Among the inappropriate activities.
ways that a board or management can enhance their
oversight include the following: RISK ASSESSMENT AND ANALYTICS

+A
 sk the right questions. Ensuring board Determining whether a company has a well-
engagement, and that the board is asking the designed compliance program calls for
right questions, is especially important during understanding the business of the company; its
challenging economic times, like many companies method for identifying, assessing, and defining
are facing as a result of the COVID-19 crisis. its risk profile; and whether the program gives
necessary scrutiny and resources to a spectrum of
+A
 ssess the identified risks. Scrutinizing whether risks. Considerations include how and in what ways
control activities are being properly carried out and the program has changed over time, whether it has
risk assessment concerns are being addressed is sufficient resources, and the lessons learned and
critical from the board and executive perspective. applied from the program.

+C
 onsider corporate culture. Monitoring and The COSO 2016 Fraud Risk Management Guide
guiding a company’s culture is critical in the acknowledges the value of data analytics in a fraud
board’s and management’s role of mitigating fraud risk management program. Data analytics supports
risks because a proactive approach to corporate fraud risk assessments by identifying red flags
culture can deter various types of misconduct and or potential high-risk areas; validating the correct
promote behaviors that can enhance morale and identification of a scheme or the validity of risk
productivity.31 assessment process findings; and being used to
develop techniques to monitor high-risk or improper
+P
 ay attention to red flags. Identifying warning behaviors.32
signs for financial statement fraud or the
environment in which they may occur is key to Data analytics can be performed on full data
deterring and detecting fraud. Some of the many populations or targeted samples. According to
examples include unusual levels of employee the ACFE, the use of data analytics can help with
turnover or firings in certain areas; increases in early fraud detection and offer insights into the
whistleblower or employee hotline complaints; a effectiveness of internal controls; but may be less
rise in employee social media complaints; vendor valuable if, for example, the scope and parameters
or other outsider complaints about business of the data analysis are poorly defined and if there
practices; and compensation practices that are concerns about data security and integrity.33

25
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Common data sources to consider when mining

for financial statement fraud risks include sales In the 2016 Fraud Risk Management Guide,
journal entries, accounts receivable, customer and COSO recommends that organizations
vendor master lists, and sub-ledgers that can include perform comprehensive fraud risk
inventory, capital expenses, and outstanding loans. assessments to pinpoint specific fraud
schemes and risks, assess their likelihood
Geographic location is another key consideration and significance, evaluate existing fraud
when designing and executing a robust fraud risk control activities, and implement actions to
assessment. During our analysis, we identified mitigate residual fraud risks.34 Important
24 instances or 17 percent of the in-scope fraud characteristics of a comprehensive fraud risk
schemes in which the misconduct occurred outside management plan include:
the United States. In addition to a company’s
+ Involving appropriate levels of management
quantitative attributes such as revenue, growth, and
on the fraud risk assessment team.
performance by business unit, risk assessments
should incorporate cross-jurisdiction risk factors, + Including entity, subsidiary, division,
including higher risk locations (e.g., those cited in operating unit, and functional levels in the
Transparency International’s Corruption Perception assessment.
Index), local regulatory environments, control
environments, use of third parties, and so on. + Analyzing internal and external factors.
+ Considering various types of fraud schemes
It is also important to assess the differences in the and exposures.
risk landscape internationally that can facilitate
or that may be exploited to perpetrate fraud. Such + Reviewing the risk of management override
considerations along with regularly updating of controls.
risk assessments to reflect new attributes and + Estimating the likelihood and significance of
fraud factors, while incorporating past findings risks identified.
or issues into the process, can further enhance
the effectiveness of an organization’s fraud risk + Assessing personnel or departments
management plan.• involved and all aspects of the fraud triangle.
+ Identifying existing fraud control activities
and assessing their effectiveness.
+ Determining and planning how to respond to
fraud risks.
+ Using data analytics for fraud risk
assessment and fraud risk responses.
+ Performing periodic reassessments and
assess changes to fraud risks.
+ Documenting the risk assessment carefully
and thoroughly.

26
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Conclusion

Throughout the Review Period, the SEC consistently number of tips received since the inception of the
brought cases for violations of the federal securities whistleblower program—of which 1,710 tips related
laws through financial statement frauds. Those to corporate disclosures and financials violations
cases reflect consistent themes and risk areas, based on the whistleblowers’ characterization.35
demonstrating that issuers and members of the Notably, the Commission received submissions
financial reporting ecosystem should continue from individuals in 78 foreign countries, with the
to pay attention to risk areas such as revenue largest volume from Canada with 91 tips, the United
recognition, establishing reserves, expense timing Kingdom with 84 tips, and China with 67 tips.
and categorization, accruals, inventory, recording
impairments, and other areas most susceptible to Although there is no perfect formula for deterring
judgment and manipulation. or detecting every instance of fraud, the types of
fraud identified by the SEC in recent years reveal
Although in many cases individuals have that the most common schemes and higher
gone to great lengths to circumvent existing risk areas are not necessarily new. The kinds of
controls, executives, companies, and financial business challenges that were frequently present
reporting ecosystem participants can learn from in enforcement cases—pressure to meet analyst
the enforcement actions how controls were expectations, increased supplier costs, slowing
circumvented and should continue to evaluate the demand for products, and more—are exacerbated
strength and efficacy of internal controls, identify during a crisis like COVID-19. These challenges are
potential weaknesses, and design and implement coupled with the unique inability in some instances
improvements to internal controls. to perform audits in person or with the same access
as in previous years. This creates enhanced risks for
Cases were brought against issuers of all sizes, in companies and auditors alike.
multiple jurisdictions, and across various industries.
In fiscal year 2020, the Commission received According to its 2020 Annual Report, the SEC
more than 6,900 whistleblower tips—the highest Division of Enforcement’s financial fraud and

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

issuer disclosure focus remained on matters corporate compliance programs, companies should
involving financial statement misstatements and not lose sight of the core issues and underlying
the executives responsible for the violations. The themes that are most pertinent to them. The key
actions brought by the Commission today continue to protecting companies against fraud is vigilance,
to highlight misconduct involving inappropriate a continued resolve to exercise skepticism,
accounting practices, such as improper revenue and attention to the potential risks. Companies
recognition aimed to enhance a company’s apparent should remain focused on the fundamentals—
performance and financial metrics. controls, processes, and environments that impact
financial recordkeeping and decision-making—and
As the SEC continues to reinforce its core principles, company-specific risks by conducting regular risk
drive new initiatives, and increase scrutiny of assessments.•

28
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Appendix A: Scope and

Methodology

and records were defined as violations of Securities

SCOPE Exchange Act of 1934 § 13.37

Our analysis was based on the review of Enforcement actions were identified as “out-
enforcement actions listed on the SEC’s archive of of-scope” if they related to the Foreign Corrupt
AAERs for the period from January 1, 2014 through Practices Act, insider trading, broker dealer, auditor’s
June 30, 2019.36 The list from the SEC’s archive improper professional conduct, reinstatement
linked to financial reporting related enforcement of previously barred accountant, independence,
actions concerning civil lawsuits brought by the investment adviser, instances in which only the
Commission in federal court and notices and orders auditor was charged, and internal accounting
concerning the institution and/or settlement of controls violations that did not include any reference
administrative proceedings. The SEC’s listing only to a fraud scheme. Enforcement actions that were
highlighted certain actions and is not meant to be follow-on administrative proceedings, follow-
a complete and exhaustive compilation of all the on suspensions and bars, or contained limited
enforcement actions that fall into this category. The information were also excluded from the scope.
data obtained from the SEC’s archive was analyzed
between July 2019 through January 2020. METHODOLOGY

For purposes of our review, we assumed the SEC’s Our review team from Latham & Watkins and
allegations in the enforcement actions to be true. AlixPartners analyzed and summarized data from
Enforcement actions were identified as “in-scope” the enforcement actions based on a predetermined
if they related to financial statement frauds and/or listing of data attributes, including but not limited
books and records violations. Financial statement to, AAER release number, AAER release date,
frauds included violations of Securities Exchange SEC enforcement action title, enforcement type,
Act of 1934 § 10 and Securities Act of 1933 § 17, respondent name, respondent type, respondent
scienter and non-scienter fraud, respectively. Books certification, relevant entities, industry, location

29
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

of misconduct, nature of misconduct (e.g., fraud information was not available for enforcement
scheme), rule violations, period 102(e) time out, actions in which the respondent was an individual.
disgorgement, pre-judgment interest, civil penalties, We further noted that the date for which financial
other fines, Sarbanes-Oxley Act Section 304 information was disclosed varied and several
clawback, undertakings, cooperation, and related issuers’ registrations had been terminated as of the
SEC press release information. date of our analysis.

In addition to the classification of financial reporting DISCLAIMER

issues that was primarily determined based on the
rule violations stated in the enforcement actions, our This publication is intended as general information
analysis required judgment in determining the nature and should not be relied on as being definite or
of the misconduct and subsequently classifying the all-inclusive. As with all other AFC resources, this
various types of fraud based on the descriptions in publication is not authoritative, and readers are
the enforcement actions. Enforcement actions that urged to refer to relevant rules and standards. If
were part of the same underlying fraud schemes legal advice or other expert assistance is required,
or charges were grouped together and considered the services of a competent professional should
part of the same “family.” It should be noted that not be sought. The AFC and its member organizations
all information was available in each enforcement make no representations, warranties, or guarantees
action; as such, only available data was summarized. about, and assume no responsibility for, the content
or application of the material contained herein.
We obtained additional financial information from The AFC expressly disclaims all liability for any
Audit Analytics for issuer respondents and relevant damages arising out of the use of, reference to,
entities where applicable. Additional data attributes or reliance on this material. This publication does
collected include auditor information, changes in not represent an official position of the AFC or its
auditor, market capitalization, revenue, assets, filer member organizations, their respective boards, or
status, and registration status. Certain financial their members.•

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 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

Appendix B: Index of Top In-Scope

Fraud Schemes

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

A. Revenue related issues

Christopher Sells and Company

AAER-3539 2014 Healthcare US 1/1/2008 12/31/2009 2 Accelerated Filer Terminated
Timothy Murawski  Employee – Other

AAER-3542 2014 Clayton T. Marshall  Company CFO Agriculture China 6/1/2008 6/30/2011 3 Accelerated Filer Terminated
Volt Information
Non-Accelerated
Sciences, Inc. and Debra Issuer/Company,
AAER-3569a 2014 Technology US 11/1/2006 10/28/2007 1 Filer and Smaller  
L. Hobbs; Jack J. Egan, Company CFO
Reporting Company
Jr.
Non-Accelerated
John ("Jack") J. Egan,
AAER-3569b 2014 Company CFO Technology US 1/1/2007 12/31/2008 2 Filer and Smaller  
Jr., CPA 
Reporting Company

31
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Volt Information
Non-Accelerated
Sciences, Inc. and Debra Issuer/Company,
AAER-3570a 2014 Technology US 11/1/2006 10/28/2007 1 Filer and Smaller  
L. Hobbs; Jack J. Egan, Company CFO
Reporting Company
Jr.
Non-Accelerated
AAER-3570b 2014 Debra L. Hobbs, CPA  Company CFO Technology US 1/1/2007 12/31/2008 2 Filer and Smaller  
Reporting Company
Edward L. Cummings, Smaller Reporting
AAER-3572 2014 Company CFO Technology US 1/1/2008 3/31/2009 1 Terminated
CPA  Company
Smaller Reporting
AAER-3573 2014 Marc Sherman  Company CEO Technology US 1/1/2008 3/31/2009 1 Terminated
Company
AirTouch
Issuer/Company,
Communications, Inc., Smaller Reporting
AAER-3576 2014 Company CEO, Communication US 7/1/2012 9/30/2012 0  
Hideyuki Kanakubo, and Company
Company CFO
Jerome Kaiser, CPA 
Issuer/Company,
Saba Software, Inc.,
AAER-3583 2014 Company Technology India 1/1/2008 6/30/2012 4 Accelerated Filer Terminated
Patrick Farrell, et al. 
Employee – Other
AAER-3584 2014 Babak ("Bobby") Yazdani  Company CEO Technology India 1/1/2008 6/30/2012 4 Accelerated Filer Terminated

Defense, Food,
JDA Software Group, Large Accelerated
AAER-3585 2014 Issuer/Company Manufacturing, US 1/1/2008 9/30/2011 4 Terminated
Inc.  Filer
Other

AAER-3591 2014 Eugene F. Hovanec, CPA  Company CFO Communication US 9/1/2001 4/30/2006 5 Accelerated Filer Terminated

Great Lakes Dredge &

AAER-3593 2014 Issuer/Company Other US 4/1/2012 9/30/2012 0 Accelerated Filer  
Dock Corporation 

Technology, Smaller Reporting

AAER-3597 2014 Linden Boyne  Company CFO US 1/1/2006 12/31/2009 4 Terminated
Manufacturing Company

Issuer/Company,
Canadian Solar, Inc. and Manufacturing, Large Accelerated
AAER-3613 2014 Company US, Canada 4/1/2009 12/31/2009 1  
Yan Zhuang  Energy Filer
Employee – Other
Smaller Reporting
AAER-3619 2015 James T. Crane, CPA  Company CFO Technology US, China 1/1/2010 5/31/2011 1  
Company
AirTouch
Issuer/Company,
Communications, Inc., Smaller Reporting
AAER-3625 2014 Company CEO, Other US 1/1/2012 12/31/2012 1  
Hideyuki Kanakubo, and Company
Company CFO
Jerome Kaiser, CPA 
Company Information Not
AAER-3629 2015 Joseph A. Kostelecky  Energy US 1/1/2012 9/30/2012 1  
Employee – Other Available

32
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

William Slater, CPA and Issuer/Company, Information Not

AAER-3636 2015 Technology US 1/1/2008 7/1/2012 5  
Peter E. Williams, III  Company CFO Available
Accelerated Filer and
Company
AAER-3647 2015 Marc J. Mize  Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Employee – Other
Company
Accelerated Filer and
Company
AAER-3648 2015 Michael Hedrick  Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Controller
Company
Accelerated Filer and
AAER-3649 2015 Timothy Edwin Scronce  Company CEO Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Company
AirTouch
Issuer/Company,
Communications, Inc., Information Not
AAER-3650 2014 Company CEO, Other US 7/1/2012 6/1/2013 1  
Hideyuki Kanakubo, and Available
Company CFO
Jerome Kaiser, CPA 
Company Large Accelerated
AAER-3653 2015 Robert Asti  Technology US 1/1/1999 3/31/2001 2 Terminated
Employee – Other Filer
Issuer/Company,
Company CEO,
Computer Sciences Large Accelerated
AAER-3662 2015 Company CFO, Technology US 1/1/2009 12/31/2011 3 Terminated
Corporation, et al.  Filer
Company
Employee – Other
Christopher Edwards, Company Large Accelerated
AAER-3672 2015 Technology US 1/1/2010 12/31/2010 1 Terminated
CA  Employee – Other Filer

AAER-3683 2015 Bankrate, Inc.  Issuer/Company Finance US 7/6/2012 8/13/2012 0 Accelerated Filer Terminated

Company
AAER-3684 2015 Hyunjin Lerner, CPA  Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated
Employee – Other
Company Large Accelerated
AAER-3694 2015 Wilfred Robert Sutcliffe  Technology US 9/1/2009 9/30/2009 0 Terminated
Employee – Other Filer
Company Large Accelerated
AAER-3695 2015 Edward Parker, CA  Technology US 1/1/2009 4/1/2009 0 Terminated
Controller Filer
Large Accelerated
AAER-3703 2015 Joseph F. Apuzzo Company CFO Manufacturing US 1/1/2000 1/1/2002 2  
Filer
Ryan Petersen; Arthur Company CEO,
AAER-3712 2015 Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated
Knapp  Company CFO

AAER-3715 2015 Arthur F. Knapp, Jr., CPA  Company CFO Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated

Company Large Accelerated

AAER-3726 2015 Charles Loveless, CPA  Manufacturing US 1/1/2003 1/1/2004 1  
Employee – Other Filer

33
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Company Large Accelerated

AAER-3727 2015 Michael McKenna, CPA  Manufacturing US 1/1/2002 1/1/2007 5  
Employee – Other Filer
Bioelectronics Corp.,
Issuer/Company,
IBEX, LLC, St. John's,
Company CEO, Smaller Reporting
AAER-3740 2016 LLC, Andrew J. Whelan, Healthcare US 8/1/2009 11/30/2014 5 Terminated
Audit Firm Company
Kelly A. Whelan, CPA,
Partner, Other
Robert P. Bedwell, CPA
Issuer/Company,
Monsanto Company, US, Canada, Large Accelerated
AAER-3741 2016 Company Agriculture 1/1/2009 12/31/2011 3 Terminated
et al.  Europe Filer
Employee – Other
Accelerated Filer and
Company
AAER-3745 2016 Julieta Favela Barcenas  Agriculture US 3/1/2013 6/30/2014 1 Smaller Reporting  
Employee – Other
Company
Issuer/Company,
Company CEO,
AAER-3766 2016 Ener1, Inc., et al.  Company CFO, Energy US 1/1/2010 6/22/2011 1 Accelerated Filer Terminated
Company
Employee – Other
Laura P. Messenbaugh, Company Smaller Reporting
AAER-3768 2016 Distribution US 6/1/2010 3/15/2012 2 Terminated
CPA  Employee – Other Company
Issuer/Company,
IEC Electronics Corp., Company Non-Accelerated
AAER-3782 2016 Ronald J. Years, CPA, Controller, Manufacturing US 1/1/2012 7/31/2013 2 Filer and Smaller  
and Donald S. Doody  Company Reporting Company
Employee – Other
Information Not
AAER-3801 2016 Scott M. Dittman, CPA  Company CEO Healthcare US 4/1/2011 5/30/2014 3  
Available 
Company Smaller Reporting
AAER-3817 2016 Julianne M. Chandler  Energy US 1/1/2010 12/31/2011 2 Terminated
Controller Company
Company Large Accelerated
AAER-3823 2016 Christopher Egan  Software Europe 1/1/2009 10/1/2011 3  
Employee – Other Filer
Jack Henry & Large Accelerated
AAER-3835 2016 Issuer/Company Software US 6/30/2012 6/30/2014 2  
Associates, Inc.  Filer
Large Accelerated
AAER-3844 2017 L3 Technologies, Inc.  Issuer/Company Defense US 6/1/2013 5/1/2014 1 Terminated
Filer
Orthofix International Large Accelerated
AAER-3845 2017 Issuer/Company Healthcare US 1/1/2011 8/31/2013 3  
N.V.  Filer
Large Accelerated
AAER-3846 2017 Jeffrey Hammel, CPA  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Large Accelerated
AAER-3847 2017 Brian McCollum  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Kenneth Mack and Company Large Accelerated
AAER-3848 2017 Healthcare US 1/1/2011 12/31/2012 2  
Bryan McMillan  Employee – Other Filer

34
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Issuer/Company, Large Accelerated

AAER-3858 2017 Ixia and Victor Alston  Software US 10/1/2012 10/1/2012 0 Terminated
Company CEO Filer
Company CFO,
Thomas Miller and Large Accelerated
AAER-3859 2017 Company Software US 1/1/2012 12/31/2012 1 Terminated
William Liang  Filer
Employee – Other
Desarrolladora Homex Large Accelerated
AAER-3862 2017 Issuer/Company Construction Mexico 1/1/2010 12/31/2013 4  
S.A.B. de C.V.  Filer
Accelerated Filer and
AAER-3866 2017 Mark McKinnies, CPA  Company CFO Energy US N/A N/A N/A Smaller Reporting  
Company
Company Large Accelerated
AAER-3867 2017 Mark Wentlent  Defense US 6/1/2013 5/1/2014 1 Terminated
Employee – Other Filer
Company Large Accelerated
AAER-3868 2017 David Pruitt, CPA  Defense US 6/1/2013 5/1/2014 1 Terminated
Employee – Other Filer
MagnaChip
Semiconductor
Issuer/Company, Asia (Not
AAER-3869 2017 Corporation and Manufacturing 6/1/2011 12/31/2013 3 Accelerated Filer  
Company CFO China or India)
Margaret Hye-Ryoung
Sakai, CPA 
Company
Michael B. Hayford, Controller, Smaller Reporting
AAER-3874 2017 Technology US 10/1/2011 11/1/2012 1 Terminated
et al.  Company Company
Employee – Other
AAER-3882 2015 Ryan Petersen  Company CEO Technology US 1/1/2010 12/31/2012 3 Accelerated Filer Terminated

Smaller Reporting
AAER-3886 2016 Michael S. Shore  Company CFO Energy US 1/1/2004 3/15/2012 8 Terminated
Company

AAER-3890 2015 Edward Dimaria  Company CFO Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated

Company
AAER-3891 2015 Matthew Gamsey, CPA  Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated
Employee – Other
Company CFO,
Thomas C. Tekulve, Jr.,
AAER-3896 2017 Company Other US 1/1/2006 12/31/2007 2 Accelerated Filer Terminated
CPA 
Employee – Other
Osiris Therapeutics, Inc.,
AAER-3905 2017 Issuer/Company Healthcare US 1/1/2014 12/31/2015 2 Accelerated Filer Terminated
et al. 
Large Accelerated
AAER-3906 2017 Paul Behrens, CPA  Company CFO Healthcare US 1/1/2003 12/31/2007 5  
Filer
Company
Large Accelerated
AAER-3910 2017 Thaddeus Bereday  Employee – Other, Healthcare US 1/1/2003 12/31/2007 5  
Filer
Lawyer

35
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Issuer/Company,
Akorn, Inc., Timothy Company CFO, Large Accelerated
AAER-3931 2018 Healthcare US 1/1/2014 12/31/2014 1  
Dick, and David Hebeda  Company Filer
Controller
Issuer/Company,
Company CEO,
Accelerated Filer and
Maxwell Technologies, Company Manufacturing,
AAER-3932 2018 US 12/1/2011 1/1/2013 1 Smaller Reporting Terminated
Inc., et al.  Controller, Energy
Company
Company
Employee – Other
Issuer/Company,
Company CEO,
Smaller Reporting
AAER-3945 2018 Axesstel, Inc., et al.  Company CFO, Communication US 10/1/2012 4/1/2013 0 Terminated
Company
Company
Employee – Other
Large Accelerated
AAER-3946 2018 KBR, Inc.  Issuer/Company Construction US, Canada 1/1/2013 12/31/2013 1  
Filer
Smaller Reporting
AAER-3950 2018 Patrick J. Gray  Company CFO Communication US 10/1/2012 3/31/2013 0 Terminated
Company
Primoris Services Large Accelerated
AAER-3978 2018 Issuer/Company Construction US 1/1/2014 12/31/2014 1  
Corporation  Filer
Smaller Reporting
AAER-3988 2018 Dhru Desai  Company CFO Technology US 1/1/2013 11/30/2016 4  
Company
Mota Group, Inc. and Issuer/Company, Information Not
AAER-3991 2018 Other US 10/1/2016 12/31/2016 0  
Mota "Michael" Faro  Company CEO Available
Accelerated Filer and
AAER-3993 2018 Pyxus International, Inc.  Issuer/Company Agriculture Africa 3/31/2012 7/1/2015 3 Smaller Reporting  
Company
The Hain Celestial Large Accelerated
AAER-3997 2018 Issuer/Company Food US 1/1/2014 5/1/2016 2  
Group, Inc.  Filer

AAER-4022 2019 Jeffrey M. Mattich  Company CFO Construction US 1/1/2005 12/31/2008 4 Accelerated Filer Terminated
Company Information Not
AAER-4023 2017 David Pruitt, CPA Defense US 6/1/2013 5/1/2014 1  
Employee – Other Available
Large Accelerated
AAER-4039 2019 Adam C. Derbyshire  Company CFO Healthcare US 5/1/2013 8/31/2014 1 Terminated
Filer
US, Central
AAER-4050 2019 David Vogel, CPA  Company CFO Technology 12/1/2011 12/31/2011 0 Accelerated Filer Terminated
America

36
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

B. Reserves related issues

AAER-3526 2014 Michael Mendes  Company CEO Food US 1/1/2009 7/31/2011 3 Accelerated Filer Terminated

AAER-3527 2014 Diamond Foods, Inc.  Issuer/Company Food US 1/1/2009 7/31/2011 3 Accelerated Filer Terminated

Jeffrey C. Kuehr and Company Large Accelerated

AAER-3560 2014 Banking US 1/1/2009 5/14/2009 0  
Michael J. Willoughby Employee – Other Filer
Bank of America Foreign Private Large Accelerated
AAER-3588 2014 Banking US 1/1/2009 3/31/2014 5  
Corporation  Issuer Filer
AAER-3626 2014 Steven Neil, CPA  Company CFO Food US 1/1/2010 12/31/2011 2 Accelerated Filer Terminated

AAER-3630 2014 Steven Neil  Company CFO Food US 1/1/2010 12/31/2011 2 Accelerated Filer Terminated
Donald J. Torbert, CPA Company CEO,
Smaller Reporting
AAER-3652 2015 and Nicole S. Stokes, Company Banking US 9/30/2008 6/30/2009 1 Terminated
Company
CPA  Controller
Company Large Accelerated
AAER-3656 2014 Thomas A. Neely, Jr.  Banking US 1/1/2009 3/31/2009 0  
Employee – Other Filer
Issuer/Company,
Company CEO,
Computer Sciences Large Accelerated
AAER-3662 2015 Company CFO, Technology US 1/1/2009 12/31/2011 3 Terminated
Corporation, et al.  Filer
Company
Employee – Other
Thomas S. Wu and Company
AAER-3671 2015 Banking US N/A N/A N/A Accelerated Filer Terminated
Thomas T. Yu  Employee – Other
Christopher Edwards, Company Large Accelerated
AAER-3672 2015 Technology US 1/1/2010 12/31/2010 1 Terminated
CA  Employee – Other Filer

AAER-3683 2015 Bankrate, Inc.  Issuer/Company Finance US 7/6/2012 8/13/2012 0 Accelerated Filer Terminated

Company
AAER-3684 2015 Hyunjin Lerner, CPA  Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated
Employee – Other
Company Large Accelerated
AAER-3694 2015 Wilfred Robert Sutcliffe  Technology US 9/1/2009 9/30/2009 0 Terminated
Employee – Other Filer
Company Large Accelerated
AAER-3695 2015 Edward Parker, CA  Technology US 1/1/2009 4/1/2009 0 Terminated
Controller Filer
Trinity Capital Smaller Reporting
AAER-3706 2015 Issuer/Company Finance US 1/1/2010 7/1/2012 2 Terminated
Corporation Company
Smaller Reporting
AAER-3707 2015 William C. Enloe Company CEO Finance US 1/1/2010 7/1/2012 2 Terminated
Company

37
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Company CFO,
Daniel R. Bartholomew Smaller Reporting
AAER-3708 2015 Company Finance US 1/1/2010 7/1/2012 2 Terminated
and Karl I. Hjelvik Company
Accountant
Ryan Petersen; Arthur Company CEO,
AAER-3712 2015 Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated
Knapp  Company CFO

AAER-3715 2015 Arthur F. Knapp, Jr., CPA  Company CFO Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated
Company Large Accelerated
AAER-3726 2015 Charles Loveless, CPA  Manufacturing US 1/1/2003 1/1/2004 1  
Employee – Other Filer
Company Large Accelerated
AAER-3727 2015 Michael McKenna, CPA  Manufacturing US 1/1/2002 1/1/2007 5  
Employee – Other Filer
Issuer/Company,
Monsanto Company, US, Canada, Large Accelerated
AAER-3741 2016 Company Agriculture 1/1/2009 12/31/2011 3 Terminated
et al.  Europe Filer
Employee – Other
Issuer/Company, Accelerated Filer and
ModusLink Global
AAER-3758 2016 Company CEO, Distribution US 1/1/2005 6/30/2012 7 Smaller Reporting  
Solutions, et al. 
Company CFO Company
Issuer/Company,
Company
Logitech International, Large Accelerated
AAER-3765 2016 Controller, Technology US 1/1/2011 12/31/2013 3  
et al.  Filer
Company
Employee – Other
Smaller Reporting
AAER-3775 2016 Swisher Hygiene Inc.  Issuer/Company Other US 1/1/2011 2/26/2013 2  
Company
FMC Technologies, Inc., Issuer/Company,
Large Accelerated
AAER-3816 2016 Jeffrey Favret, CPA and Company Technology US 1/1/2013 6/30/2014 1 Terminated
Filer
Steven K. Croft, CPA  Controller
Orthofix International Large Accelerated
AAER-3845 2017 Issuer/Company Healthcare US 1/1/2011 8/31/2013 3  
N.V.  Filer
Large Accelerated
AAER-3846 2017 Jeffrey Hammel, CPA  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Large Accelerated
AAER-3847 2017 Brian McCollum  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Kenneth Mack and Company Large Accelerated
AAER-3848 2017 Healthcare US 1/1/2011 12/31/2012 2  
Bryan McMillan  Employee – Other Filer
General Motors Large Accelerated
AAER-3850 2017 Issuer/Company Transportation US 1/1/2012 6/30/2014 2  
Company  Filer
Nasir N. Shakouri,
Robert S. Torino,
Company Non-Accelerated
AAER-3861 2017 Bronson L. Quon, John Finance US 2/1/2008 8/31/2012 5  
Employee – Other Filer
S. Hong and Jonathan
K. Skarie 

38
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Accelerated Filer and

AAER-3866 2017 Mark McKinnies, CPA  Company CFO Energy US N/A N/A N/A Smaller Reporting  
Company
MagnaChip
Semiconductor
Issuer/Company, Asia (Not
AAER-3869 2017 Corporation and Manufacturing 6/1/2011 12/31/2013 3 Accelerated Filer  
Company CFO China or India)
Margaret Hye-Ryoung
Sakai, CPA 
AAER-3882 2015 Ryan Petersen  Company CEO Technology US 1/1/2010 12/31/2012 3 Accelerated Filer Terminated

AAER-3890 2015 Edward Dimaria  Company CFO Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated

Company
AAER-3891 2015 Matthew Gamsey, CPA  Finance US 7/6/2012 8/13/2013 1 Accelerated Filer Terminated
Employee – Other
Company Information Not
AAER-3893 2017 Waldemar Grab  Energy Canada 1/1/2012 3/31/2014 2  
Controller Available
Company CFO,
Large Accelerated
AAER-3933 2018 Philip John James, et al.  Company Technology Europe 1/1/2012 12/31/2013 2  
Filer
Controller
Large Accelerated
AAER-3946 2018 KBR, Inc.  Issuer/Company Construction US, Canada 1/1/2013 12/31/2013 1  
Filer
Advanced Drainage
Issuer/Company, Large Accelerated
AAER-3949 2018 Systems, Inc. and Mark Manufacturing US 1/1/2014 3/29/2016 2  
Company CFO Filer
B. Sturgeon, CPA 
Smaller Reporting
AAER-3965 2016 Michael J. Kipp  Company CFO Other US 5/1/2011 12/31/2011 1  
Company
Company Smaller Reporting
AAER-3966 2016 Joanne K. Viard, CPA  Other US 5/1/2011 12/31/2011 1  
Employee – Other Company
Company Smaller Reporting
AAER-3967 2016 John Pierrard  Other US 5/1/2011 12/31/2011 1  
Employee – Other Company
Senior VP of Sales Information Not
AAER-3974 2017 Nasir Shakouri  Finance US 2/1/2008 8/31/2012 5  
and Marketing Available
Executive VP and Information Not
AAER-3975 2017 Robert Torino  Finance US 2/1/2008 8/31/2012 5  
COO Available
Company Information Not
AAER-3976 2017 Bronson L. Quon, CPA  Finance US 2/1/2008 8/31/2012 5  
Employee – Other Available 
Barrett Business Issuer/Company,
AAER-3977 2018 Services, Inc. and Mark Company Other US 1/1/2012 12/31/2014 3 Accelerated Filer  
Cannon, CPA  Controller
Information Not
AAER-3986 2018 James Douglas Miller  Company CFO Other US 1/1/2012 10/29/2014 3  
Available 

39
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Santander Consumer Large Accelerated

AAER-4002 2018 Issuer/Company Finance US 1/1/2014 12/31/2016 3  
USA Holdings Inc.  Filer
Hertz Global Holdings,
Large Accelerated
AAER-4012 2018 Inc. and the Hertz Issuer/Company Transportation US 2/1/2012 7/16/2015 3  
Filer
Corporation 
AAER-4022 2019 Jeffrey M. Mattich  Company CFO Construction US 1/1/2005 12/31/2008 4 Accelerated Filer Terminated

Company Large Accelerated

AAER-4034 2016 Jennifer F. Wolf, CPA  Technology US 1/1/2011 12/31/2013 3  
Controller Filer
GT Advanced Large Accelerated
AAER-4045 2019 Issuer/Company Manufacturing US 10/1/2013 8/5/2014 1 Terminated
Technologies Inc.  Filer
Company
AAER-4048 2019 Michael T. Rand, CPA  Construction US 7/18/2014 7/18/2014 0 Accelerated Filer  
Accountant

AAER-4055 2019 R. Gordon Jones, CPA Other Energy US 7/15/2013 4/1/2014 1 Accelerated Filer Terminated

C. Inventory related issues

Smaller Reporting
AAER-3558 2014 I. John Benson, CPA,  Company CFO Other US 1/1/2009 12/31/2011 3  
Company
Edward L. Cummings, Smaller Reporting
AAER-3572 2014 Company CFO Technology US 1/1/2008 3/31/2009 1 Terminated
CPA  Company
Smaller Reporting
AAER-3573 2014 Marc Sherman  Company CEO Technology US 1/1/2008 3/31/2009 1 Terminated
Company
Smaller Reporting
AAER-3596 2014 Dr. L.S. Smith  Company CEO Other US 1/1/2009 12/31/2011 3  
Company
Company CFO,
AAER-3641 2015 Robert W. Elliot  Company Food US 5/1/2008 1/31/2014 6 Accelerated Filer  
Employee – Other
Accelerated Filer and
Company
AAER-3647 2015 Marc J. Mize  Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Employee – Other
Company
Accelerated Filer and
Company
AAER-3648 2015 Michael Hedrick  Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Controller
Company
Accelerated Filer and
AAER-3649 2015 Timothy Edwin Scronce  Company CEO Other US 1/1/2012 3/13/2013 1 Smaller Reporting  
Company

Non-Accelerated
AAER-3704 2015 Stein Mart, Inc. Issuer/Company Other US 1/1/2010 12/1/2012 3 Filer and Smaller  
Reporting Company

40
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

Ryan Petersen; Arthur Company CEO,

AAER-3712 2015 Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated
Knapp  Company CFO

AAER-3715 2015 Arthur F. Knapp, Jr., CPA  Company CFO Technology US 4/1/2010 5/31/2012 2 Accelerated Filer Terminated

Issuer/Company,
Company
Logitech International, Large Accelerated
AAER-3765 2016 Controller, Technology US 1/1/2011 12/31/2013 3  
et al.  Filer
Company
Employee – Other
Issuer/Company,
IEC Electronics Corp., Company Non-Accelerated
AAER-3782 2016 Ronald J. Years, CPA, Controller, Manufacturing US 1/1/2012 7/31/2013 2 Filer and Smaller  
and Donald S. Doody  Company Reporting Company
Employee – Other
General Cable Large Accelerated
AAER-3840 2016 Issuer/Company Manufacturing South America 1/1/2008 6/30/2012 4 Terminated
Corporation  Filer
Orthofix International Large Accelerated
AAER-3845 2017 Issuer/Company Healthcare US 1/1/2011 8/31/2013 3  
N.V.  Filer
Large Accelerated
AAER-3846 2017 Jeffrey Hammel, CPA  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Large Accelerated
AAER-3847 2017 Brian McCollum  Company CFO Healthcare US 1/1/2011 12/31/2012 2  
Filer
Kenneth Mack and Company Large Accelerated
AAER-3848 2017 Healthcare US 1/1/2011 12/31/2012 2  
Bryan McMillan  Employee – Other Filer
Accelerated Filer and
AAER-3866 2017 Mark McKinnies, CPA  Company CFO Energy US N/A N/A N/A Smaller Reporting  
Company
AAER-3882 2015 Ryan Petersen  Company CEO Technology US 1/1/2010 12/31/2012 3 Accelerated Filer Terminated
Issuer/Company,
Akorn, Inc., Timothy Company CFO, Large Accelerated
AAER-3931 2018 Healthcare US 1/1/2014 12/31/2014 1  
Dick, and David Hebeda  Company Filer
Controller
Accelerated Filer and
AAER-3993 2018 Pyxus International, Inc.  Issuer/Company Agriculture Africa 3/31/2012 7/1/2015 3 Smaller Reporting  
Company
Company Large Accelerated
AAER-4034 2016 Jennifer F. Wolf, CPA  Technology US 1/1/2011 12/31/2013 3  
Controller Filer
Large Accelerated
AAER-4039 2019 Adam C. Derbyshire  Company CFO Healthcare US 5/1/2013 8/31/2014 1 Terminated
Filer

41
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

D. Impairment related issues

Jeffrey C. Kuehr and Company Large Accelerated

AAER-3560 2014 Banking US 1/1/2009 5/14/2009 0  
Michael J. Willoughby Employee – Other Filer
Wilmington Trust Large Accelerated
AAER-3582 2014 Issuer/Company Finance US 1/1/2009 12/31/2010 2 Terminated
Corporation  Filer
Bank of America Foreign Private Large Accelerated
AAER-3588 2014 Banking US 1/1/2009 3/31/2014 5  
Corporation  Issuer Filer
First National Issuer/Company, Accelerated Filer and
AAER-3622 2015 Community Bancorp Company Banking US 1/1/2009 10/27/2010 2 Smaller Reporting  
Inc. and William Lance  Employee – Other Company
Donald J. Torbert, CPA Company CEO,
Smaller Reporting
AAER-3652 2015 and Nicole S. Stokes, Company Banking US 9/30/2008 6/30/2009 1 Terminated
Company
CPA  Controller
Company Large Accelerated
AAER-3656 2014 Thomas A. Neely, Jr.  Banking US 1/1/2009 3/31/2009 0  
Employee – Other Filer
Company CEO,
Philip A. Pendergraft, Company CFO, Finance, Smaller Reporting
AAER-3697 2015 US 9/1/2009 4/1/2010 1 Terminated
et al.  Company Entertainment Company
Employee – Other
Home Loan Servicing Large Accelerated
AAER-3713 2015 Issuer/Company Finance Caribbean 1/1/2012 12/31/2014 3 Terminated
Solutions, Ltd.  Filer
Issuer/Company,
Company CEO,
Company CFO,
Company
The St. Joe Company,
AAER-3716 2015 Controller, Real Estate US 1/1/2009 3/3/2011 2 Accelerated Filer  
et al. 
Company
Accountant,
Company
Employee – Other

AAER-3733 2016 Ocwen Financial Corp.  Issuer/Company Finance US 1/1/2012 12/31/2014 3 Accelerated Filer  

Issuer/Company,
Company CEO,
AAER-3766 2016 Ener1, Inc., et al.  Company CFO, Energy US 1/1/2010 6/22/2011 1 Accelerated Filer Terminated
Company
Employee – Other
Large Accelerated
AAER-3776 2016 Jane E. Starrett, CPA  Company CFO Finance US 1/1/2007 12/31/2007 1 Terminated
Filer

42
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

SEC Enforcement Type of Issuer/Company Location of Duration Registration

AAER No. Year Start Date End Date Filer Status
Action Title Respondent Industry Misconduct (Years) Status

ICON Capital LLC

Information Not
AAER-3783 2016 f/k/a ICON Capital Issuer/Company Finance US 1/1/2009 12/31/2012 4  
Available
Corporation 
Park National Large Accelerated
AAER-3804 2016 Issuer/Company Finance US 1/1/2010 8/31/2011 2  
Corporation  Filer
Issuer/Company,
Company CEO, Accelerated Filer and
Orrstown Financial
AAER-3807 2016 Company CFO, Finance US 1/1/2010 6/30/2011 1 Smaller Reporting  
Services, Inc., et al. 
Company Company
Employee – Other
Foreign Private Non-Accelerated
AAER-3996 2018 Agria Corporation  Agriculture China 7/1/2010 3/13/2013 3 Terminated
Issuer Filer
Santander Consumer Large Accelerated
AAER-4002 2018 Issuer/Company Finance US 1/1/2014 12/31/2016 3  
USA Holdings Inc.  Filer

43
 MITIGATING THE RISK OF COMMON FRAUD SCHEMES

1 The National Law Review, “Fraud in 19 ACFE, Tone at the Top: How
the Time of COVID-19,” 2020. Management Can Prevent Fraud in the
2 Deloitte, Risk and Controls in a Crisis: Workplace.
Frequently Asked Questions, 2020. 20 SEC, AAER-3662: Computer Sciences
3 CAQ, Understanding Cybersecurity Corporation, et al., 2015; SEC, AAER-
and External Audit in the COVID-19 3672: Christopher Edwards, CA, 2015;
Environment, 2020. SEC, AAER-3694: Wilfred Robert
Sutcliffe, 2015; SEC, AAER-3695:
4 SEC, CF Disclosure Guidance: Topic
Edward Parker, CA, 2015.
No. 9, 2020; SEC, CF Disclosure
Guidance: Topic No. 9A, 2020. 21 SEC, Division of Enforcement 2018
Annual Report, 2018.
5 Bloomberg Tax, “SEC Watching for
Signs Companies May Blame Old 22 Finra, “Diversification: Market Cap,
Problems on Virus,” 2020. Explained,” 2018.
6 SEC, Division of Enforcement 2020 23 Sarbanes-Oxley Act of 2002.
Annual Report, 2020. 24 Audit Analytics, SOX 404 Disclosures:
7 COSO, Fraudulent Financial Reporting: A Sixteen Year Review, 2020.
1998-2007, An Analysis of U.S. Public 25 Audit Analytics, 2019 Financial
Notes
Companies, 2010. Restatements: A Nineteen Year
8  SEC, AAER-3712: Ryan Petersen; Comparison, 2020.
Arthur Knapp, 2015; SEC, AAER-3715: 26 SEC, “Observations on Culture at
Arthur F. Knapp, Jr., CPA, 2015; SEC, Financial Institutions and the SEC,”
AAER-3882: Ryan Petersen, 2017. 2018.
9  FASB, Accounting Standards Update: 27 SEC, AAER-3845: Orthofix
Revenue from Contracts with International N.V., 2017; SEC, AAER-
Customers (Topic 606) and Leases 3846: Jeffrey Hammel, CPA, 2017;
(Topic 842), 2020. SEC, AAER-3847: Brian McCollum,
10 Deloitte, “Clamping Down on 2017; SEC, AAER-3848: Kenneth
Potential Revenue Recognition Mack and Bryan McMillan, 2017; SEC,
Fraud,” 2018. AAER-3851: Orthofix International
N.V., 2017.
11 SEC, AAER-3526: Michael Mendes,
2014; SEC, AAER-3527: Diamond 28 CAQ, Managing Fraud Risk, Culture,
Foods, Inc., 2014; SEC, AAER-3626: and Skepticism During COVID-19,
Steven Neil, CPA, 2015; SEC, AAER- 2020.
3630: Steven Neil, 2015. 29 AFC, Skepticism in Practice, 2020.
12 SEC, AAER-3704: Stein Mart, Inc., 30 SEC, “The SEC Enforcement Division’s
2015. Focus on Auditors and Auditing,”
13 FASB, Accounting Standards Update: 2016.
Financial Instruments—Credit Losses 31 AFC, Assessing Corporate Culture:
(Topic 326), 2016. A Proactive Approach to Deter
14 SEC, AAER-4002: Santander Misconduct, 2020.
Consumer USA Holdings Inc., 2018. 32 Deloitte, “5 Insights Into Fraud Risk
15 AICPA, Management Override of Analytics,” 2017.
Internal Control: The Achilles' Heel of 33 ACFE, “Using Data Analytics to Detect
Fraud Prevention, 2016. Fraud,” 2014.
16 CAQ, Guide to Internal Control Over 34 COSO, Fraud Risk Management Guide
Financial Reporting, 2013. Executive Summary, 2016.
17 BerryDunn, “How Does Your Control 35 SEC, Office of the Whistleblower 2020
Environment Look in a Remote Annual Report, 2020.
World?,” 2020. 36 SEC, Accounting and Auditing
18 SEC, “Three Key Pressure Points Enforcement Releases, 2020.
in the Current Enforcement 37 Securities Act of 1933; Securities
Environment,” 2014. Exchange Act of 1934.

44
 INSIGHTS FROM SEC ENFORCEMENT ACTIONS

Acknowledgements
Latham & Watkins is dedicated to working with
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Clients depend on the firm to find innovative
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45
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