According to the DoJ the following reporting entities were used by one or more of their high managerial agents (e.g., officers) to commit accounting fraud warranting disclosure on its website: 1) TierOne; 2) ArthroCare, and 3) General Reinsurance Corp. All of these entities were publicly reporting companies / subsidiaries of publicly reporting companies. Upon reviewing documentation for these cases through the Internet, I became reminded of the intellectually stimulating nature of accounting fraud investigations. The financial reporting in these matters involved the following aspects:
- Creating a financial reality materially misleading as to the “true financial condition” of the reporting entity (see the Langford Information, Purpose of the Conspiracy 12. on p. 6);
- Creating a materially misleading financial reality materially inconsistent with the counterparty’s account of the same transactions (see the Napier Information, Overt Act 17.m. on p. 10);
- Creating a financial reality materially misleading as to the “true nature” of the affected transactions (see the ArthroCare Information, Purpose of the Scheme 16. on p. 4).
Though some may rashly extract from these matters that they merely reflect ‘Creative Accounting 101,’ they may indicate much more than this. Accounting fraud is difficult for prosecuting attorneys (cf. the civil / administrative actions of the SEC) because they require not only a deep understanding of financially accounting for aggregated legal fictions such as corporations and transactions occasionally expressed in obtuse jargon and providing for rights and obligations in the future (e.g., swaps of risks) but also an ability to explain such matters in terms readily understandable to laypersons (e.g., juries of non-accountants) such that the laypersons come away with the conclusion that the individual(s) had a guilty state of mind (i.e., culpability). Proof of accounting fraud may require so much documentation and analysis that the prosecuting attorney surrenders to this often intimidating intellectual barrier. Pleas, including deferred- / non-prosecution agreements, and fines are more quickly obtained and leave better tastes in the mouths of most interested parties.
Culpable states of mind in accounting and related frauds (e.g., specific intent to defraud) are intangible and based on inference from other evidence and data. For example, the economic fact that an entity in a low tax jurisdiction functions as a tax avoidance / reduction / deferral mechanism does not invariably mean that the controlling persons’ intent was to evade taxes. Economic and financial advantages are rarely phrased in language reflecting awareness of breaking law or regulation. The coding of transactions by market participants and reporting entities does not include the line-items and classifications of fraud expense, liability for tax evasion, assets obtained through fraudulent manner and means, etc. The individuals use the coding afforded by generally accepted accounting principles (GAAP), industry standards, professional jargon, etc. to conceal the true nature of their conduct. Determining the true nature of anything, including financial transactions, is not always easy, especially under the standard of proof of beyond a reasonable doubt.