Types of Accounting Fraud an SEC Whistleblower Should Look For

February 24, 2022


When reporting a violation to the SEC through the use of an SEC whistleblower law firm, it is useful for a whistleblower to be aware of the signs of accounting fraud. Whistleblowers that report to The SEC Whistleblower Program about potential violations of federal securities laws can receive significant whistleblower awards, and further can potentially stay anonymous with the use of an SEC whistleblower attorney. Underneath the secret underbelly of the SEC Whistleblower Program, whistleblowers’ identities may be protected and kept anonymous, as long as they are represented by an attorney and further an SEC whistleblower lawyer may maximize the chance for the case to be accepted into the program. Accounting fraud is often when companies, with the intention of appearing more stable than they are to investors, manipulate financial accounts and commit financial statement fraud. The discerning eye will know the difference between “creative accounting” versus outright fraud.  Here are types of accounting fraud that potential SEC whistleblowers should look out for and discuss with an accounting fraud whistleblower law firm:

 Improper timing of revenue recognition – Accounting Fraud

Improper timing of revenue recognition is, by far, the most common method that companies use to commit accounting fraud. Improper timing of revenue recognition is when companies manipulate the timing of revenues in order to either meet financial benchmarks or decrease business value. In either even they are often doing it for the benefit of the insiders at the expense of the shareholders, a hallmark SEC violation.

 Fictitious Revenue – Accounting Fraud

Fictitious Revenue is when companies record falsified revenues for sales that never happened. The purpose of this is to artificially increase earnings. Sometimes, a company will attempt to justify the accounting by imputing sales they think are likely to happen for an ephemeral accounting benefit and disregard correcting the failure of the consummation of the sale.

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 Channel Stuffing – Accounting Fraud

Channel stuffing occurs when companies artificially increase revenues right before a reporting period by sending more products to retailers and distributors than typically purchased. Companies allocate all of those sales to the current reporting period, which allows companies to meet financial benchmarks. This, however, is often counterproductive for companies as the practice can damage sales for future periods and the artificial inflation for the quarter without transparency will lead to a deflation of the next quarter to the detriment of the shareholders.

Third-Party Transactions – Accounting Fraud

Through transactions such as bill and hold sales and contingency sales, companies use false third-party transactions to improperly recognize revenue.

Fraudulent Management Estimates – Accounting Fraud

Fraudulent management estimates are when the management of a company inappropriately reports inaccurate accounting estimates. This is done so that financial statements appear better than they are.  

Improper Capitalization of Expenses- Accounting Fraud

Improper capitalization of expenses is when expenses are immediately converted into assets. As companies must identify expenditures as either assets or expenses, improper capitalization causes expenses to be underreported and assets to be inflated. Costs that can be utilized in this type of fraud can be advertising, websites and software development, maintenance, development and research, among others.

Other Improper Expense Recognition Schemes – Accounting Fraud

There are other improper expense recognition schemes that companies use fraudulently, such as assigning more costs towards inventory than goods sold, cookie jar reserves (having excess and undisclosed reserves to be used during future low profit periods), postponing or getting rid of expenses for the current reporting period, not recording impairments in assets, and understating reserves for losses such as those caused by debts and loans.

Misleading Forecasts or Projections – Accounting Fraud

Misleading forecasts or projections are deliberately used by companies to omit that they have an increased probability of missing financial goals. Accurate and truthful metrics are necessary for investors when making assessments regarding financial statements.

Misleading Non-GAAP Reporting – Accounting Fraud

GAAP, or Generally Accepted Accounting Principles, are not used by all companies, as some companies believe that GAAP doesn’t offer enough information to be reliable metrics. Thus, Non-GAAP metrics are used by companies when GAAP metrics do not holistically show a company’s financial situation. Misleading non-GAAP reporting is when companies inaccurately report their finances using non-GAAP metrics. This is so that companies appear more financially stable and profitable than they actually are.

Inadequate Internal Controls Over Financial Reporting (ICFR) – Accounting Fraud

Companies involved with the SEC are required by law to have an internal control over financial reporting, or ICFR. The purpose of ICFR is to ensure that financial statements are reliable, recorded correctly, and follow GAAP. There are various frauds that breach ICFR, such as inadequate internal controls over financial reporting, where certain transactions and costs are not properly recorded or recognized.

If you’re an insider and you suspect your company is engaging in an accounting fraud at the expense of the shareholders, now is the time to blow the whistle.  Hundreds of millions of dollars have gone to SEC whistleblowers as awards for inside information into accounting fraud and with the use of a skilled SEC whistleblower law firm, like Brown, LLC, you may be able to stay anonymous and maximize your potential whistleblower award.


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