My article in the AICPA Corporate Finance Insider Newsletter

Reasonable accountants can disagree about whether a move to International Financial Reporting Standards (IFRS) will improve financial reporting. One key concern is that principles-based financial statements are much more susceptible to fraud. Rather than relying on strict rules, management’s judgment will guide much of the reporting. Clearly this creates a risk of fraud, but how big is the risk?

Today’s Compliance Week article, “SEC Pursues Small Company Over Lax Internal Controls,” [subscription required] discusses the SEC settlement with Koss Corp over the $34 million embezzlement by former Vice President of Finance Sujata (Sue) Sachdeva.

The article explains the settlement, which is essentially a clawback of some of Michael Koss’s compensation:

From my Thought Leadership series at Securities Docket:

When a whistleblower goes to a government agency with allegations of fraud and corruption, no one knows whether the government will act. The more detailed and credible the allegations, the more likely the government will ask questions.  The company may even have the great “fortune” of being subject to a full-blown government investigation.

Guest Post by Michael Volkov

In-House counsel and corporate compliance officers dodge bullets everyday as they stare down the barrels of aggressive prosecutors, regulators, civil litigants, whistleblowers, disgruntled employees and shareholders prodded by trial attorneys to file derivative suits at the drop of a hat. In the face of all of these risks, internal investigations have become commonplace and a standard defensive tactic for a company to regain some leverage, learn the scope of a potential problem and then develop a plan for resolving a particular issue.

All too often, companies follow the rote formula developed in the Sarbanes-Oxley era of the early 2000s. Those same formulas are being applied in the Foreign Corrupt Practices Act, and in more discrete global anti-corruption, money laundering, export compliance and antitrust enforcement matters.

The steps to take when an employee comes forward with a fraud tip, whether the allegations are false or not.

By Tracy Coenen, Contributor to CFO.com

You think your company has a robust compliance program to prevent financial-statement fraud, asset misappropriation, Foreign Corrupt Practices Act violations, and other financial frauds. There are checks and balances in place, with lawyers, internal auditors, executives, and the board of directors keeping an eye on things.

Still, the unthinkable happens. Reports of a major internal fraud surface, and the scheme may involve several members of middle or upper management. The information – received through an employee’s whisper, an internal hotline, or the rumor mill - has enough substance to be deemed credible, yet not enough to know exactly who is involved, how wide-reaching the fraud may be, the amount of money stolen, or the exposure to government action and penalties.

Recently I wrote about an internal investigation I did for a company which received a whistleblower complaint, sent to executives, the board of directors, and the Securities and Exchange Commission. Upon receiving notification that allegations of fraud were being made by a former employee, management immediately started evaluating the claims. The board of directors began planning for an independent investigation.

This was the right thing to do, particularly as the SEC’s whistleblower program gives a 120 day window of time for companies to react to internal allegations of securities fraud. If someone reports allegations to a company, 120 days pass, and then the informant goes to the SEC, the SEC will consider the person making the report to be a whistleblower eligible for a bounty.

Compliance professionals can talk at length about the importance of conducting internal investigations when there are whistleblower reports of fraud, corruption, and other questionable behavior. But what actually matters is doing something when the time comes. This case study  illustrates how one public company did it right to head off big trouble when the SEC came knocking.

A supervisory employee in the company’s accounting department was having performance problems. She was counseled repeatedly, and management decided that one final warning was in order. The employee had a “last chance” meeting with management, in which she was told that the next step would be termination if her she did not meet certain performance expectations.

My second book, Expert Fraud Investigation: A Step-by-Step Guide, was recently reviewed by my colleague Michael Goldman for The Value Examiner, the magazine published for the National Association of Certified Valuation Analysts. It’s read by consultants who work in the areas of business and asset valuation, business fraud deterrence, detection, and investigation, litigation consulting, and financial forensics.

I thought Michael’s review was very kind. And for the record, he and I had never met until a few days ago, so I didn’t have a chance to influence his review in any way. I love reviews like this because they really help prospective buyers of the book get a better idea of whether the book has what they need.

Michael’s review…

Today the U.S. Court of Appeals for the Second Circuit upheld the conviction and prison sentence of former WorldCom CEO Bernard Ebbers. The 64-year-old defendant was convicted in 2005 of nine counts of conspiracy, securities fraud, and false SEC filings. He received a 25-year prison sentence, which all but assures that he will die in prison.

WorldCom’s demise was an $11 billion accounting fraud that included improper capitalization of operating costs, among other things. It sent WorldCom, a company with stock previously valued at $180 billion, into bankruptcy. Ebbers’s defense was that the CFO, Scott Sullivan, and his subordinates committed the fraud without his knowledge.

Ebbers’s attorney argued that the sentence was excessive and that Ebbers did not receive a fair trial because potential defense witnesses weren’t offered immunity from prosecution in exchange for their testimony. The witnesses said they would use the fifth amendment to avoid testifying.

Ebbers has been free while the appeal was pending, and is expected to be ordered to prison soon.

Last week, my column The Fraud Files for the Wisconsin Law Journal was entitled How to Catch Employees Stealing. And it was about just that – what employers can do to help catch employees in the act of stealing from them.

Now, of course, you don’t want employees stealing from you at all. So it’s not really about catching them, as much as it is about letting them know that they will be monitored so that if they do decide to steal, we will know.