When Companies Go Bad, They Go Overboard

By one measure, the number of crooked companies -- always relatively tiny -- is shrinking. But when they go bad, they seem to go really bad.

Deloitte, the accounting, auditing and consulting firm, recently reviewed every Accounting and Auditing Enforcement Release filed by the Securities and Exchange Commission from 2000 through 2006.

The goal was to see where fraud was occurring and what kinds of fraud were most common. But it also provided some insight into other aspects of corporate fraud.

Enforcement actions peaked at 77 in 2003, a year after Congress enacted the Sarbanes Oxley law and increased the S.E.C.'s enforcement budget. No surprise there.

The number of actions filed since then has steadily drifted downward, to 55 in 2004, 50 in 2005 and 44 last year. Hardly supports critics' claims that Sarbanes-Oxley has criminalized honest errors or that regulators have run amok.

What's interesting, though, is that while the number of companies accused of fraud has declined, the number of frauds detected has not. Why? Because companies that do cook the books now tend to prepare multi-course meals: They perpetrate multiple frauds at the same time, Deloitte says.

While the number of enforcement actions fell between 2003 and 2004, for example, the number of frauds described in those actions actually increased: to 252 from 215. Deloitte found 208 different frauds last year, about the same number as in 2005.

The researchers found 22 companies that committed 10 or more fraud schemes at the same time, for example. Four of those 22 companies under investigation were accused of more than 20 frauds at the same time. Only 83 companies coming in for scrutiny -- fewer than one in four -- were accused of only one fraudulent activity.

The most common fraud (41 percent of all) was fudging revenue. More than one-third of the time, that consisted of simply recording fictitious revenue. Second most commonly was a close cousin: Recording inappropriate amounts of revenue from round-tripping, swaps or barter arrangements -- paper transactions with no substantive benefit to the company.

The numbers were determined by reviewing every S.E.C. enforcement action issued from January 2000 to December 2006, a total of slightly more than 1,300, Deloitte said. After weeding out actions against insider traders, auditors and vendors, it was left with 344 instances of fraud by companies.

by Mark Stein