Mitigating the Risk of Common Fraud Schemes: Insights from SEC Enforcement Actions

January 2021

Published: AFC Anti- Fraud Collaboration

Over the years, the Securities and Exchange Commission’s (“SEC”) enforcement efforts have focused on a wide range of alleged misconduct, related but not limited to, intentional and non-scienter frauds, issuer reporting and disclosures, auditor shortcomings, absent or insufficient internal controls, deficient disclosure controls, non-GAAP measures, the Foreign Corrupt Practices Act, securities offerings, insider trading, broker dealer, and cyber-related misconduct.

Given the unique impact of financial statement frauds and relevance to companies, auditors, and investors, the Anti-Fraud Collaboration (“AFC”) undertook a study to classify common financial statement fraud schemes based on an analysis of SEC enforcement actions involving accounting or auditing issues where the SEC has issued an Accounting and Auditing Enforcement Release (“AAER”).

The SEC issued a total of 531 AAERs from January 1, 2014 through June 30, 2019. This study focused on 204 enforcement actions related to financial statement frauds from which we identified 140 fraud schemes. The objective of this study is to provide observations on higher risk areas that are susceptible to fraud and insights into what companies can do to identify and mitigate these types of fraud risks more effectively.

The most common types of fraud identified included:

–        Improper revenue recognition

–        Reserves manipulation

–        Inventory misstatement

–        Loan impairment deferral


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