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04/23/2012

When Accounting Fraud Brings Down the House of Cards


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Certified Public Accountants, in spite of the trade or business, have a responsibility to uphold the very best standards of ethics and professionalism. CPAs are usually viewed as one of the foremost trusted professions within the world. They are additionally among the foremost regulated professions, the requirements to obtain the CPA designation being one of the most stringent (including having to complete a series of education and knowledge requirements before being allowed to take a seat for the US CPA Exam). Even once they pass the CPA Exam, they must maintain their education through continuing professional education as regulated by their state board of accountancy. Additionally, if they are a member of a state CPA society and/or the American Institute of CPAs, they need to maintain higher levels of CPE and a code of professionalism.

MORALLY SPEAKING

It can be a frightening task for CPAs when they are presented with a moral dilemma. They need to weigh all the choices and guarantee they are presenting the accurate and legal recommendations. That said, CPAs do not need to supply specific solutions for dilemmas as they arise. Instead, CPAs generally exist to advise business decision makers on how to proceed. This advice can take many forms, including shaping how future earnings are recorded. Take into thought this example:

A set of executive level managers instruct their CPA to record a transaction in a fraudulent manner that will in turn reflect the company’s higher revenue generation for the last quarter of the year.

This is a comparatively common state of affairs faced by several CPAs. The executives are attempting to make sure they earn revenue-based bonuses or achieve other ulterior motives for manipulating the financials. CPAs should recognize that the right way to record earnings is to record those that only exist for the last quarter of the year and not what is already contracted for income through the primary month of ensuing year. The most accurate method of recording this is to ensure the timeline of earnings matches the work flow process for the quarter.

YOUR POSITION

Ultimately it is the company’s executives that need to form the final decision; however, they have the professional recommendation of a CPA to help. As a CPA, you recognize you are obligated to record actual earnings, and by following the executives’ desires you would be violating your moral standards and also the law. At the end of the day, it is your license and name that is at risk. Failing to uphold the moral standards you have sworn to and reporting the earnings inappropriately might get you in trouble, which could lead to a loss of license, fines, and even jail time. The repercussions you stand to encounter are way more expensive than what you stand to achieve.

If you do choose to abide by the executives’ wishes, there is a good chance you will get caught. If your company is chosen for a random audit or if you are a public company and are regularly audited, a simple accounting mistake like this will be noticed. This will trigger to investors, regulatory agencies, and auditors that your financial reports may not be in order and cause greater scrutiny of your books. If there are any other accounting mistakes, it could bring down the entire house of cards.

WHAT TO DO

The proper solution in this case is not to follow the executives’ wishes, but to explain to them the correct way to record revenue. A possible solution here that may benefit all parties is to list the scheduled income collection/debiting dates that go through January of the following year. This would allow enough revenue to have been generated for the executives to earn their bonuses. It will also show that physically, the money had not been collected as a result of the schedule for collection of revenues.

Whether you are a salaried CPA or have your own firm, you need to maintain the highest ethical and professional conduct. Trying to please your boss to get ahead at work and violating those moral standards can hurt your career in the long term. If at any time you as a CPA suspect fraud within your firm or your clients financials, it is to your benefit to make note of when you noticed it, and then document it, and contact the National Association of State Boards of Accountancy to determine how to proceed. This will help ensure your license is not being jeopardized.

–Grant Webb, Bisk Education. Bisk has been training accountants and financial professionals for more than 40 years. For questions or comments, Grant can be reached on Twitter @grantwebb2.

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