Financial statement and disclosure fraud occurs when companies misrepresent financial information or omit material information in public statements. Publicly traded companies report major events to the public through press releases and filings with the Securities and Exchange Commission (SEC).
Financial statement fraud can occur when a company uses accounting tricks to increase its reported earnings and revenues for a particular reporting period, or fails to disclose material liabilities or adverse events.
If you are aware of a company making fraudulent statements or failing to disclose material information, contact us here or at 617-823-3217 to learn more about how you can file a claim with the SEC whistleblower program.
Definition of Financial Statement and Disclosure Fraud
Financial statement and disclosure fraud refers to the act of manipulating financial statements and disclosures in order to deceive investors and regulators.
This can include:
- overstating assets
- understating liabilities
- manipulating revenue and income
- concealing financial information
- not disclosing material adverse events
Note that these forms of misconduct may also be referred to as accounting fraud.
Financial statement and disclosure fraud is a serious crime and violation of securities laws that can result in severe legal and financial consequences for both the individuals and companies involved. If you have knowledge of financial statement fraud within your company or organization, it is crucial that you come forward as a whistleblower to report this illegal activity.
Importance of Financial Statement and Disclosure Fraud in the financial industry
A company’s financial statements and disclosures are the primary means by which they communicate their financial health and performance to investors, regulators, and the public.
When financial statement fraud occurs, it undermines the integrity of the financial markets, misleads investors, undermines investors’ confidence in financial markets more generally, and can lead to significant financial losses.
Additionally, the company and the individuals involved in fraudulent financial reporting can face legal consequences such as fines, penalties, or even imprisonment.
Types of Financial Statement and Disclosure Fraud
One of the most common types of financial statement fraud is overstating assets. This can be done by inflating the value of assets on the balance sheet, or by recognizing revenue or income prematurely.
This type of fraud is often committed by companies facing financial difficulties in an attempt to make the company appear more financially stable. This can be deceiving for investors, creditors, and regulators and can lead to significant financial losses.
Another type of financial statement fraud is understating liabilities. This can be done by underreporting debt, undervaluing potential losses, or failing to disclose liabilities altogether.
Understating liabilities on a company’s financial statements can mislead investors and regulators by misrepresenting the risk factors relating to the company’s financial position.
Manipulating revenue and income
Manipulating revenue and income can be done by recognizing revenue prematurely, overstating sales, or failing to record expenses.
Companies might manipulate revenue and income on their financial statements if they are under pressure to meet financial targets or to present a positive financial performance to investors and regulators.
This can create a false picture of the company’s financial performance and result in financial losses and legal consequences.
Concealing financial information
Another type of fraudulent financial reporting is concealing financial information. This can be done by failing to disclose important financial information, such as off-balance sheet transactions, related party transactions, or changes in accounting policies.
This type of fraud can be committed by companies in an effort to conceal financial problems or to present a stronger financial position. Concealing financial information can make it difficult for investors, creditors and regulators to understand the true financial health of a company.
Warning signs of financial statement and disclosure fraud
There are a variety of warning signs or indicators that a company may be engaged in financial statement and disclosure fraud. Some common red flags include:
- Consistently achieving financial targets through unrealistic or aggressive accounting practices that are inconsistent with generally accepted accounting principles (GAAP)
- Lack of transparency in accounting practices and the financial reporting process
- Constant restatements of financial statements or disclosures
- Consistently high profit margins or returns on assets, especially in comparison to industry averages
- Unusually consistent sales growth
- Unusual or unexplained transactions or activities
- A significant amount of related-party transactions
- Resistance to internal or external audits
It is important to note that red flags or warning signs alone do not necessarily indicate financial statement and disclosure fraud, but they may indicate the need for further investigation.
If you have concerns about potential fraud risk factors at a company, contact our experienced whistleblower attorneys today.
The SEC whistleblower program provides an avenue for individuals to report illegal or unethical behavior within a company or organization, including for instances of financial statement and disclosure fraud.
The securities laws provide significant protections to whistleblowers, including confidentiality, anti-retaliation provisions, and monetary awards.
These protections encourage individuals to come forward with information about false or misleading information in a company’s financial reporting, which can help detect and prevent the fraud, and ultimately protect the integrity of the financial markets.
Consequences of Financial Statement and Disclosure Fraud
Legal and regulatory repercussions
Companies and individuals found to be involved in financial statement and disclosure fraud can face significant fines, penalties, and even imprisonment.
The Securities and Exchange Commission (SEC) and Department of Justice (DOJ) are the primary regulatory bodies responsible for enforcing securities laws and investigating financial statement fraud. They have the authority to bring civil and criminal charges (in the case of the DOJ) against companies and individuals found to be involved in financial statement and disclosure fraud.
Additionally, shareholders, investors and other parties can also bring private lawsuits against companies and individuals for damages resulting from fraudulent financial statements or disclosures.
Damage to reputation and public trust
Financial statement fraud can lead to negative publicity and a loss of credibility with investors, customers, and other stakeholders. This can result in a loss of business, stock value, and even bankruptcy.
Additionally, for instances of fraud involving senior management, the company and its executives may face legal and regulatory repercussions, which can further damage its reputation.
The long-term effects of financial statement and disclosure fraud on a company’s reputation can be severe and difficult to recover from.
Losses for investors and shareholders
When a company commits financial statement and disclosure fraud, it can artificially inflate the value of its stock, leading investors to purchase shares at inflated prices. When the fraud is discovered, the stock value drops, resulting in significant financial losses for investors.
Potential for bankruptcy
When a company engages in financial statement and disclosure fraud, it generally creates a false picture of its financial health. This can result in investors and creditors providing funding or credit based on false or misleading information.
When the fraud is discovered, the company may be unable to meet its financial obligations, leading to bankruptcy. Additionally, the legal and regulatory repercussions of financial statement fraud–including fines and penalties–can further compound the financial difficulties of the company.
This can exacerbate the above-mentioned issues and further contribute to losses for investors and shareholders.
Contact an SEC whistleblower attorney today
If you have knowledge of financial statement and disclosure fraud and are considering becoming a whistleblower, Jeff Newman Law can provide you with the legal representation and guidance you need.
We have a track record of recovering multi-million dollar settlements on behalf of our whistleblower clients.
Contact us for a free confidential assessment of whether you might have a potential SEC whistleblower lawsuit that could result in an SEC whistleblower award:
- Contact us for a free confidential consultation
- Call us at (617) 823-3217