Accounting Fraud

Accountants can report fraudulent schemes across a variety of sectors. Many accounting frauds involve bread-and-butter manipulation of a company’s financial statements. This can often involve exaggerating assets and revenue or misrepresenting expenses or liabilities through a variety of techniques.

For example, improper revenue recognition is one of the most common forms of accounting fraud. This can involve fictitious sales, “cannel stuffing” where a company ships excess supply to distributors and books the distributions as sales, or prematurely booking revenues before a sale is final for accounting purposes. Alternatively, companies can manipulate their expenses to misrepresent their financial health. One of the most common ways to do so is improperly capitalizing expenses so they can be treated as an asset that depreciates over time, delaying recognition of the expense. And any of these manipulations can occur in any number of forms that ultimately misrepresent the financial health of the company.

Because of their access to financial records, accountants are often well-positioned to detect other forms of misconduct as well. For example, accountants may detect misappropriation of company assets or other forms of securities or commodities frauds. Likewise, accountants working for healthcare companies or other government contractors may identify false billings to the government.

Finally, accountants can also report misconduct at their own firms. In recent years, the SEC has brought numerous enforcement actions against accounting firms. For example, EY paid $100 million to resolve allegations that its employees cheated on ethics exams and that it misled investigators looking into this misconduct. Likewise, KPMG paid $50 million to resolve allegations that it altered its audit work after receiving stolen information about future inspections by the Public Company Accounting Oversight Board (PCAOB). More recently, the SEC fined and permanently suspended BF Borgers after concluding that it had engaged in a "deliberate and systematic" failure to comply with auditing standards.

• CFTC and SEC Whistleblower Programs: Under these programs, whistleblowers can submit confidential tips concerning any misconduct regulated by the SEC or CFTC, including accounting violations, misrepresentations to U.S. investors, market manipulation, insider trading, and Foreign Corrupt Practices Act violations by publicly traded companies.
  • Both programs generally allow accountants as whistleblowers, with limited exceptions that do not apply in most cases. An experienced attorney can help analyze the specific circumstances of your case.
  • Both programs also allow anonymous submissions when a whistleblower is represented by an attorney and have a strong track record of protecting whistleblowers’ identities.
  • The SEC and CFTC programs also provide financial incentives. If a whistleblower’s information leads to a successful enforcement action, they can receive between 10-30% of the government’s recovery.
• False Claims Act: Accountants can also report fraud on the government under the state and federal False Claims Acts (FCA). Unlike the agency whistleblower programs, a whistleblower in a FCA matter files a lawsuit in court. The Department of Justice then investigates the claims and determines whether to take over—or “intervene” in—the case. A whistleblower can continue the case on the government’s behalf even when it does not intervene.
  • If a whistleblower’s FCA case is successful, the whistleblower typically receives a reward of 15% to 25% of the government’s recovery when it intervenes or 25-30% if it declines to do so.
  • New York, the District of Columbia, and Illinois also allow whistleblowers to sue for unpaid taxes under their False Claims Acts.
• IRS Whistleblower Program: Under the IRS program, whistleblowers can submit confidential tips concerning federal tax underpayments, as well as failure to report offshore bank accounts in violation of foreign bank account reporting (FBAR) requirements.
  • Accountants are broadly authorized to submit tips under the IRS program. However, federally authorized tax practitioners should consult with an attorney to determine whether the tax-practitioner privilege under 26 U.S.C. § 7525 may apply.
  • Whistleblowers can receive an award of 15-30% of any unpaid taxes and penalties recovered by the IRS using their information.
• FinCEN Program: The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) oversees a new whistleblower program covering violations of the Bank Secrecy Act and certain U.S. sanctions laws.
  • The program is closely modeled on the SEC and CFTC whistleblower programs and allows whistleblowers to submit confidential or anonymous tips, which are then routed to the appropriate government agency for investigation.
  • As with those programs, whistleblowers can receive awards of 10-30% of the government’s recovery if their information leads to a successful case.

Under the IRS, SEC, CFTC, and FinCEN whistleblower programs, the government is generally required to maintain the confidentiality of whistleblowers, and typically, it does so throughout its investigation. Further, under the SEC, CFTC, and FinCEN programs, whistleblowers may submit information anonymously if they are represented by counsel.

In False Claims Act matters, the case is filed “under seal” in a federal district court. That means that only the court and the Department of Justice, and not the Defendant, have access to the whistleblower’s complaint. The government then investigates, which usually takes years. During this investigative phase of the case, the whistleblower’s identity remains secret. When the government decides whether to join the case, the case is typically unsealed and public, though a whistleblower’s identity can sometimes still be protected.

All of these programs protect whistleblowers from employer retaliation, including firing, demoting, suspending, threatening, harassing, or discriminating against whistleblowers who provide information to or assist the government. Whistleblowers who are retaliated against for their whistleblowing may sue for reinstatement, back pay, and other damages. These protections generally apply even if the whistleblower does not receive an award, as long as they had a reasonable belief that a violation occurred or would soon occur.

• Electrical Power Overcharging: Three Whistleblower Partners lawyers led the representation of whistleblower Sam Barakat and several government entities in a case alleging that the Los Angeles Department of Water and Power knowingly overcharged schools and other public agencies for electric power over the course of a decade. The case relied heavily on dissecting elaborate cost accounting to demonstrate that the government had been overcharged relative to the true cost of service, leading to a $224 million recovery for the government.
• Defense Contractor Overcharging: One of our whistleblower attorneys led the representation of Richard Bagley, a former chief financial officer for TRW’s Redondo Beach unit, in a case against Northrop Grumman Corp. and TRW Inc. for overcharging the Department of Defense on various military programs. The case alleged that the defendants shifted costs from private contract work to government contracts, engaged in unlawful accounting methods, and manipulated their financial data to collect millions of dollars in excess payments on Defense Department programs. The government joined the case, and the defendants paid $111 million. Mr. Bagley received a whistleblower reward of $27 million.
• Hospital Cost Reporting: Two Whistleblower Partners lawyers represented clients in FCA cases alleging that hospitals created false cost reports for purposes of billing Medicare, leading to hundreds of millions of dollars in government recoveries and tens of millions of dollars in rewards for the whistleblowers.