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When Accountants Foster Fraud

Guest Author - Consuelo Herrera, CAMS, CFE

Monthly fees of $12,000 to $14,000 seem like a great deal for an accountant. It depends. If these fees are the result of deceitfulness, they are rather a source of stress, feelings of guilt, and apprehension knowing that sooner than later the accountant providing fraudulent financial statements will be caught.

A case relevant to this subject is the case of Madoff's accountant. According to the Securities and Exchange Commission's findings, Madoff retained to issue audited financial statements, prepare all kind of reports on internal control, analyses, etc. This accountant, according to the complaint, did not follow practices established by the American Institute of Certified Public Accountants, AICPA. For example, he did not apply professional skepticism when performing his duties, did not comply with the AICPA Code of Professional Ethics, did not follow established audit procedures and evidence. He was charged with several counts of securities fraud, wire fraud, money laundering, among other federal crimes. Was worth it earning those high fees to end up in jail?

The following is an example of how pervasive securities fraud is. Sadly behind each case like this, there are accountants who decided to have an attitude of willful blindness. This is the case:

I have received e-mails and advertising from companies offering investors the opportunity to invest money for purposes of trading in foreign currency ("FOREX"). I would not place my trust in these kinds of investments without an exercise of due diligence. For example, one company stated that for a minimum investment of $10,000, investors could deposit money with their program; the investors provided them with a limited power of attorney that granted the them the right to direct the trading of their funds in the FOREX market.

The investment company raised approximately $40 million from approximately 750 investors in the purported foreign currency trading venture.

What did this company offer to its investors?

Representations to investors, made in writing and/or orally, included the following:

o Investors could track the use of their funds through daily and monthly with account statements and
o Investors could track trades as they happened;
o Company setup a trading system with a stop-loss program, so investors could lose no more than an agreed-upon percentage of their initial investment; and
o Earnings would come from profits generated by trading.

Investors signed draw-down forms which purported to cap losses at a specified percentage, typically 30%. Once they lost $3,000 of their investment it was expected to stop.

Needless to say that none of these representations were true.

The Outcome?

The officers of that corporation diverted investor money for their own personal purposes, including funding operations, personal expenses, and expenses for other companies with which they were associated. These officers apparently committed fraud because through their knowledge or reckless disregard, traded investors’ money without full disclosure to investors, and in ways inconsistent with their representations to investors. The outcome was that the said lost significant investor assets, far beyond what was authorized by the draw-down form.

Make sure you are in compliance with laws and regulations. As an accountant, your responsibilities go beyond issuing financial statements. Public confidence deserves your commitment, ethical behavior, and reliability.



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Content copyright © 2014 by Consuelo Herrera, CAMS, CFE. All rights reserved.
This content was written by Consuelo Herrera, CAMS, CFE. If you wish to use this content in any manner, you need written permission. Contact BellaOnline Administration for details.

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