Who Benefits from Accounting Irregularities in Financial Statement Frauds?
Of the 1,335 public companies identified by the Securities and Exchange Commissions (SEC) in its Accounting and Auditing Enforcement Release (AAER), one thousand seventeen (1,017) were directly linked to fraud cases and 347 were subjected to analysis in the COSO report.
It was disclosed that 21% of the Chief Executive Officers (CEOs) involved in the accounting irregularities proven as financial statement frauds were indicted, and that 64% of those indicted were convicted. On the other hand, only 17% of the Chief Financial Officers (CFOs) were indicted, of which 75% were actually convicted.
In our compilation of overviews about the ten major accounting scandals, in a separate article bearing the same title, most CFOs eventually turned state witness and were incarcerated for lesser terms than their CEOs.
The rationale behind this is that the CEO benefit the most from fraudulent financial reporting. As those at the highest level among the senior executives, they stand to gain substantially by way of profit shares and bonuses in accordance with their compensation arrangements. Hence, their interests are directly linked to financial statement measurements in terms of revenue generation, which clearly define their motives in collaborating with their CFOs to commit accounting irregularities. Another article, " A Detailed Look at the Enron Accounting Scandal," reveals how the company's CEO, Kenneth Lay, gained from all the accounting manipulations.
The investors and employees are at the losing end. However, regulating bodies deem that the latter are in better positions to prevent substantial economic losses by blowing the whistle on their company bosses.