Our Attorney Fight Back Against Financial Fraud Committed By Manipulation of Financial Statements
Financial statement manipulation is a type of accounting fraud that can lead to investment losses for a company’s stockholders. Publicly-traded companies have a legal duty to accurately disclose their financial performance and prospects, and manipulating financial data in order to paint a false picture of a company’s stability or viability as a going concern is a form of investor fraud.
Federal laws prohibit companies from publishing manipulated financial statements, and the U.S. Securities and Exchange Commission (SEC) routinely pursues enforcement actions against companies suspected of releasing false reports. However, investors who suffer losses due to financial statement manipulation must take legal action on their own in order to recover their fraudulent investment losses.
Is Falsifying Financial Statements Illegal?
Yes, altering financial statements is illegal, which includes the act of changing a company’s financial statements to hide profit or loss. Falsifying financial statements can be a type of accounting fraud if there is intent, but it can also be unintentional. If you suspect financial statement manipulation, speak with an accounting fraud attorney to learn about your legal options.
Investors who have concerns about financial statement manipulation or business metric manipulation need to be proactive in order to recover their losses. A financial recovery is not guaranteed, but acting promptly will generally afford the greatest opportunity to pursue a successful claim in securities litigation or FINRA arbitration. Investors who have these concerns will want to work with a law firm that has specific experience handling financial statement manipulation cases, as these cases present a variety of unique issues and challenges.
Why Do Companies Manipulate Their Financial Statements?
There are a variety of reasons why a company might manipulate its financial statements or release manipulated financial statements in its public disclosures. Most cases of corporate financial statement manipulation involve one or more of the following:
- Intentional efforts by corporate executives or the board of directors to misrepresent the company’s financial standing to investors, lenders or others
- Negligence or misconduct on the part of company personnel who are responsible for preparing financial statements
- Inadequate corporate controls to detect accounting manipulation and prevent the publication of inaccurate financial data
Whether a company intentionally or inadvertently publishes misleading financial data, the consequences for investors can be the same. So, while intent might be an issue in the criminal prosecution of company insiders, it generally is not an issue in civil securities fraud litigation. Investors can pursue claims for both intentional and negligent corporate misconduct; and, through these claims, investors can seek to recoup the losses they have incurred.
How Financial Statements Can Be Manipulated
Broadly speaking, companies can manipulate their financial statements in two ways: (i) they can falsely inflate their earnings or profitability, or (ii) they can underreport their financial performance for a defined period. Both are equally serious forms of financial fraud.
When most people think of accounting manipulation, they think of falsely inflating a company’s financial standing. A company will either overstate its revenue or underreport its expenses in order to fraudulently enhance its reported profitability. A company may also adjust its metrics in order to characterize its financial condition in a more positive light, and this type of business metric manipulation can give rise to fraud claims as well.
For example, corporate financial statement manipulation may involve:
- Prematurely recording revenue (i.e. reporting revenue prior to completing services or delivering products)
- Recording revenue for products or services a customer is not required to purchase
- Recording revenue for sales that have not taken place
- Recording investment income as business revenue
- Recording loan proceeds as business revenue
- Recording the sale of corporate assets as business revenue
- Recording the transfer of corporate funds from an investment account to an operating account as business revenue
- Shifting business expenses by amortizing at an incorrect rate, changing accounting standards or practices, or accelerating or delaying the write-off of corporate assets
- Improperly reporting expenses and liabilities related to products or services to be delivered in the future
- Delaying the recording of income or revenue
Failure to Maintain Adequate Internal Control Leading to Business Metric Manipulation
Publicly-traded companies should have mechanisms in place to guard against these types of accounting fraud and business metric manipulation. They should also rely on outside auditors and other outside professionals to ensure that no issues go overlooked prior to releasing financial statements publicly. However, companies often fail to take these steps (both intentionally and unintentionally); and, in addition to pursuing claims for financial statement manipulation, in many cases investors will be able to pursue claims for failure to maintain adequate internal controls as well.
In some cases of corporate financial statement manipulation, investors may also be able to pursue claims against their brokers and advisors. Brokers and advisors owe various duties to their clients, and this includes a duty to make sound investment recommendations based on a clear understanding of the stocks they are recommending. If a broker or advisor could have discovered financial statement manipulation by reviewing a company’s public disclosures (or even identified concerns about possible accounting manipulation) and failed to do so, then the broker or advisor could be liable for investment fraud.
Speak with a Financial Statement Manipulation Lawyer at Zamansky LLC
Our firm represents shareholders in financial statement manipulation cases nationwide, which includes cases against companies that have released fraudulent financial statements as well as claims against brokers and advisors who are responsible for their clients’ investment losses. Our lawyers can comprehensively assess your legal rights, and we can seek just compensation on your behalf by all means available.
If you have questions about recovering investment losses related to corporate financial statement manipulation, we encourage you to get in touch. To speak with an experienced investor lawyer in confidence, call 212-742-1414 or request a free consultation online today.