Society Helps Journalists Investigate the Numbers

By Lois Whitehead, Public Relations Manager

Twenty-six reporters from consumer magazine BusinessWeek attended a forensic accounting seminar hosted by the Society last month.

The event is just the latest example of the Society’s myriad efforts to help educate journalists about different accounting and business matters.

The two-hour presentation by Debbie A. Cutler, a partner with Kramer, Love & Cutler, LLP, also included a discussion on restatements by Michael Young, a partner with Willkie Farr & Gallagher LLP.  

In her presentation, Cutler gave reporters suggestions for investigating financial statement fraud in their stories and also discussed common fraud methods that can appear in financial statements.

Cutler stressed that all three parts of the fraud triangle—opportunity, pressure and rationalization—generally exist in financial statement fraud cases. By eliminating one of these three characteristics, the risk of material misstatement due to fraud decreases.

“A prime example of pressures experienced by corporate executives commences in the quarterly earnings call-in conference call when analysts question results,” Cutler said. “When those results are lower than expected, the cascading effect could lead to the devaluation of the company’s stock price, and in the extreme case ultimately may lead to bankruptcy or delisting on an exchange.” 

“When senior management is involved in alleged fraudulent financial reporting, it is not uncommon for there to be a power struggle between management versus the audit committee,” co-presenter Young said.

He pointed out that the Sarbanes-Oxley Act opened the door for the audit committee to unilaterally finance an investigation into the numbers and, if necessary, get the Securities and Exchange Commission involved.

The seminar had been in the works since last spring, when top BusinessWeek staff attended the ceremony for the Society’s Excellence in Financial Journalism Awards ceremony. David Henry, associate business editor, coordinated the presentation.

The seminar outlined everything from the history of forensic accounting to new SEC laws to combating fraud.

“SAS 99 requires the auditor to design audit procedures to identify fraud risk factors by incorporating forensic procedures in the audit process,” said Cutler, although she pointed out that “only a court of law can determine whether a fraud has or has not occurred because an accountant cannot determine the intent of an alleged fraudster.”

In a recently released report on restatements, Huron Consulting Group statistics show the number of restatements in 2004 is on the rise; they have increased at record levels.

“It seems that the scrutiny placed on company internal controls and other pressures surfaced a large number of reporting problems this past year,” the report stated. Others think the increase in restatements could be due to companies being more conservative in reporting their financial results, taking special care to correct any errors.

To examine alleged fraudulent financial reporting, Cutler said, it’s important to go inside the company, meet the people involved and observe nonverbal clues during an interview.

“It can be useful to get to look people in the eye,” Young added.

While Cutler applauded the provisions under Sarbanes-Oxley as a step in the right direction to curtail fraudulent financial reporting, she said it might take time to bring about change within the accounting profession and corporations. As a member of the Fraud Task Force of the American Institute of CPAs’ Forensic and Litigation Services Subcommittee, she is in the process of defining the term “forensic accounting” to be considered by the AICPA.

Cutler and Tim Hedley, a partner at KPMG, will cochair the Foundation for Accounting Education’s Anti-Fraud Conference, to be held June 20.