Rich and Wealth

Other Consequences

The monetary fines assessed on defendants for alleged acts of fraudulent financial reporting seem low, almost inconsequential. The low amounts may suggest to some that it is worth trying to get away with reporting transgressions. It is important to keep in mind, however, that the SEC’s monetary fines are not necessarily the end of the matter. As noted, there is always the threat of criminal prosecution, which provides a dark cloud that can hang over defendants for some time. In addition, other costs may accrue to players of the financial numbers game, beyond the potential civil and criminal penalties, that dwarf, in financial terms, the direct costs that the SEC may assess. The significant reduction in shareholder value that accompanies the often-breathtaking declines in share prices following announcements of accounting problems and SEC investigations is one such consequence. Others include the costs associated with class action litigation and the reduced liquidity associated with a delisting of a company’s shares by an organized share-trading exchange.63

Criminal Prosecution In Chapter 2 we presented the example of Aurora Foods, Inc. In early 2000 the company restated its results for the last two quarters of 1998 and three quarters of 1999, wiping out $81,562,000 of pretax earnings for those two years. The company had recognized revenue prematurely and had improperly capitalized promotional expenses paid to retailers.

Less than a year after the announced restatement, a federal grand jury indicted four of the company’s former executives on charges they engaged in “a criminal conspiracy to cook the company’s books.”64 According to prosecutors, the former executives had annual bonuses that were tied directly to Aurora’s earnings. They took steps to boost those earnings by “improperly classifying [promotional expenses] as assets and in others by directing underlings to understate the expenses in the company’s records.”65 The criminal charges faced by the former executives include conspiracy, securities fraud, making false statements in the company’s public financial filings, keeping false books and records, and lying to the company’s independent auditor.

Numerous examples of successful criminal prosecutions of corporate executives found guilty of financial fraud are provided in Exhibit 4.7. As can be seen in the exhibit, in recent years criminal prosecutors have been successful in prosecuting financial frauds.

Taken From : The Financial Numbers Game