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In Case You Hadn’t Heard….Forensic Accountants and Justin Timberlake Have More in Common Than You Thought

June 4th, 2013 by Rebekah Smith

The recent headline, “The S.E.C. is ‘Bringin Sexy Back’ to Accounting Investigations” caught my eye.  Of course it did.  I’m a forensic accountant and while I (and maybe I’m the only one) think it’s a very interesting occupation, I understand that most of the population does not equate accounting to exciting, let alone “sexy.”

The article goes on to highlight the decline in corporate accounting cases the S.E.C. has pursued, noting that it dropped to its lowest level in a decade with “only 79 such cases filed in the most recent fiscal year.”  But The Wall Street Journal reports that new S.E.C. chairwoman Mary Jo White wants to shine the spotlight back on accounting fraud and policing corporate disclosures to protect the public investors.

The article rightly goes on to detail how difficult this mission will be.  Unlike insider trading cases, accounting fraud cases take a long time to develop.  The misstatement rarely happens overnight as developing evidence requires a tremendous amount of time digging through years of financial records with a significant commitment to resources.  And even when a violation is uncovered, generally accepted accounting principles (GAAP) can allow for interpretation that may give corporate management room to argue that the company acted in “good faith, even if it might have been overly aggressive.”

The S.E.C. also faces budgetary challenges, which may restrict its ability to commit the resources required.  The article rightfully points out that this is the time to commit the resources and keep a watchful eye.  “Accounting fraud usually starts small, as a company tries to meet earnings and revenue projections, so managers may fudge the numbers a little bit in the hope that the next quarter will let them make up for any questionable entries in the books.”  As more people believe that the economy is rebounding, the pressure will increase for businesses to show profits and positive movement, resulting in increasing pressures.

The S.E.C. might not be as popular at Justin Timberlake, but it certainly will be interesting to see if they can “bring sexy back” to forensic accounting.

What do you think – does an increased pressure to perform emerging from difficult economic times increase the risk for accounting misstatements or fraud?

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