Practice Areas

Accounting Fraud

Accounting Fraud

What is Accounting Fraud?

Accounting fraud is the intentional manipulation of financial statements to create a false appearance of corporate financial health. It occurs when an employee, accountant, or the organization itself misleads investors and shareholders. Falsification of financial statements is achieved by overstating revenue, failing to record expenses, and/or misstating assets and liabilities. Accounting fraud may be investigated by a number of different federal agencies, usually the Securities and Exchange Commission (SEC) and the FBI.

Accounting Fraud in the Real World

The 2001 Enron scandal is the most well-known example of accounting fraud. Enron used off-balance-sheet (assets/liabilities that do not appear on a company’s balance sheet) entities to hide its debts from investors and creditors. Although using such entities was not illegal in itself, Enron’s failure to disclose the necessary details of its dealings constituted accounting fraud. The consequences were severe. As the true extent of Enron’s debts became known to the public, its share price collapsed, and it soon went bankrupt. The federal government successfully prosecuted several of the company’s top executives, who were sent to prison.

How is Accounting Fraud Charged?

The Department of Justice prosecutes accounting fraud using several different criminal statutes, including, but not limited to the following:

18 U.S.C. § 1520 – destruction of corporate audit records

This statute provides that accountants who conduct audits or reviews of an issuer of securities to which section 10A(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j-1(a)) applies, shall maintain the workpapers thereof for five years from the end of the fiscal period in which the audit or review was conducted. 

Penalties for prematurely destroying corporate audit records include up to ten years in federal prison in addition to a significant fine. 

15 U.S.C. § 78j – manipulative and deceptive devices

In short and simple terms, this statute provides that it is illegal to use “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of securities.  Securities include notes, stocks, bonds, certificates of interest or participation in any profit-sharing agreement, etc.

18 U.S.C. §§ 1956 & 1957 – money laundering

Fundamentally, money laundering is a necessary consequence of almost all profit-generating crimes.  Recognizing this and its potential to conceal crime and distort financial systems, state, federal, and international law enforcement agencies have increasingly turned their attention to investigating and prosecuting money laundering. 

The Money Laundering Control Act of 1986 established money laundering as a federal crime carrying a maximum punishment of up to twenty years in federal prison and half a million dollars in fines. 

18 U.S.C. § 1956 criminalizes acts such as tax evasion, concealing the nature of the illegal activity, and conducting or attempting to conduct a financial transaction involving money earned from criminal activity.

18 U.S.C. § 1957 forbids knowingly engaging or “attempting to engage in a monetary transaction in criminally derived property of a value greater than $10,000” derived from specified unlawful activity. In other words, this statute outlaws monetary transactions “contaminated” by the origin of the property involved in the transaction.

Irvine, California Accounting Fraud Attorney

The first and most important decision a defendant or anyone facing an accounting fraud investigation must make is to retain the right defense attorney. Responding to an accounting fraud investigation or charges requires a proactive, coordinated, and proactive approach. White collar federal defense attorney Peter Hardin has a long and outstanding track record of establishing clear communication with federal law enforcement agents and prosecutors and responding swiftly and accurately to search warrants and subpoenas. Because Peter Hardin has prosecuted and defended against criminal cases, such as accounting fraud, for nearly 20 years, he understands not just the law, but the way federal authorities investigate cases and the prosecutorial tactics that follow. It is essential that anyone who may be under investigation for accounting fraud, or who has been charged with accounting fraud, act quickly to build a strong defense and protect their rights. Contact Peter Hardin now for a free and confidential consultation.

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