Fraudulent Financial Reporting

Fraudulent financial reporting has been on ongoing issue for decades, from the infamous Anderson and Enron case in 2001 back to the 1977-1984 ESM Government Securities and Jose Gomez case, where Gomez received a “loan” for silence and intentionally misrepresented the financial statements. In 1985 the National Commission on Fraudulent Financial Reporting, also known as The Treadway Commission (Commission) was formed to search and study factors that could be linked or lead to fraudulent financial reporting. The Commission along with Committee of Sponsoring Organizations (COSO) issued the Treadway Commission Report (Report) which highlight the need to change corporate culture and encourage a system be put in place to identify factors that could eventually lead to fraudulent financial reporting.

The Report includes recommendations to the company, the independent public accountant, the SEC and/or other regulatory agencies, and to the education system. For purposes of this report we will focus on the one of the recommendations related to the company, The Tone at the Top. The Tone at the Top emphasizes that top management within which financial reporting occurs must set the right tone that could prevent and or detect fraudulent activity early in the process. If the tone of management and/or corporate is laidback then the likelihood of fraudulent reporting is higher. The Report recommends that the companies incorporate a framework which includes; identifying, understanding, and assessing the risk of fraudulent financial reporting and to design and implement internal controls. Internal controls are used for preventing and detecting fraud.

In 2002, CEO of Tyco International, Ltd. (Tyco), Dennis Kozloski and Mark H. Swartz, chief lieutenant, were charged with stealing $150 million and selling company shares for $430 million ultimately inflating the value of the stock. Kozloski claimed that the $150 million were bonuses that were authorized by the board. Many board members testified that the payments were never authorized. Not only was Kozloski and Swartz convicted of grand larceny, conspiracy, falsifying business records and securities fraud, Kozloski will also be tried for tax evasion of over $1 million. Kozloski is accused of purchasing $8-12 million worth of art from