Corporate Finance & Governance | Ethics & Professional Issues | Leadership / Management | Legislative / Regulatory

In SOX’s wake, is fraud actually on the rise?

Fraud Wasn't the Sarbanes-Oxley Act supposed to put a dent in corporate fraud?

You bet it was.

Whether it has or not is open to debate.

In a piece of commentary, James Kaplan argues that fraud -- or at least the motivation to commit fraud -- has risen sharply since Sarbanes-Oxley took effect in 2002.

"CEOs' and CFOs' biggest incentive to 'cross the line' is to maximize their own compensation. And that incentive has gotten ever bigger as the percentage of pay linked to stock prices has increased," writes Kaplan, co-founder and chairman of the financial research firm Audit Integrity. "As the economy has faced mounting stress, many companies have been feeling pressure merely to survive. This pressure may lead to fraudulent behavior to mask decaying operations."

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission has produced some numbers that support Kaplan's conclusion. In a recent report, COSO found evidence of 347 cases of alleged public company fraud between 1998 and 2007, up from 294 cases between 1987 and 1997. The dollar amounts of those alleged cases also skyrocketed between 1998 and 2007.

The consequences of high-profile fraud are severe. According to the COSO report, "news of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline in the two days surrounding the announcement. Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange or asset sale, and in nine out of 10 cases the SEC named the CEO and / or CFO for alleged involvement."

When so much is on the line, why would fraud seemingly be on the rise?

Kaplan has some ideas. In his article, Kaplan says corporate fraud will persist as long as boards of directors aren't subjected to greater scrutiny, the economy remains strained and executive compensation is linked to stock prices.

Then there's this, courtesy of one of Kaplan's readers: "Lack of personal integrity is the problem. Legislation will not change that."

I buy that. Doing the right thing means you aren't doing the wrong thing. It all comes down to your own personal code of ethics ... or lack thereof.

Learn more here
Dan Dreibelbis Jr., special inspector general of the Troubled Asset Relief Program, will present a program titled "Vendor Fraud: Detection and Investigation by CPAs," as part of the Maryland CPA Summit (formerly the MD Biz Expo) on June 29. Get details and register here.

The MACPA also offers a ton of ethics training. Visit our online CPE catalog and search for "ethics," then tell us: How big of a problem is fraud in your organization?


Bill Sheridan