Securities Fraud: Responding to Allegations of Accounting Irregularities
Being accused of securities fraud related to accounting irregularities can be scary. As a business leader, you may feel anxious, angry, or confused. First take a breath – this article aims to walk you through the key considerations in responding to such allegations.
The most important thing is to stay calm and avoid knee-jerk reactions. Carefully investigate the claims through your legal counsel and auditors. If the claims have merit, be upfront and take responsibility. If not, clearly communicate the facts. In all cases, focus on doing right by your shareholders and stakeholders.
Understanding the Allegations
Securities fraud refers to illegal practices related to the trading of securities (stocks, bonds etc). Common claims include:
- False or misleading statements
- Insider trading
- Accounting fraud
Accounting irregularities fall into the false/misleading statement and accounting fraud categories. They refer to failures to follow Generally Accepted Accounting Principles (GAAP) in recording and reporting financial performance. Some examples:
- Overstating revenue or earnings
- Understating liabilities or expenses
- Improperly valuing assets
- Failing to disclose relevant information
Such actions can artificially inflate financial results. They may be part of intentional efforts to “cook the books.” Or they could reflect poor accounting practices vs willful deception.
Assessing the Validity of Claims
First, resist making any public statements until you investigate. Consult legal counsel to understand the specific allegations and your rights/responsibilities in responding.
Financial reporting requires judgment calls. Not every mistake is fraudulent. Work with your audit committee and external auditors to thoroughly evaluate the claims. Consider questions like:
- Do the allegations reflect clear accounting errors or differences in judgment?
- Is there evidence to suggest intentional deception or recklessness?
- How material are the potential misstatements?
Document your investigation process to show regulators you take it seriously. The goal is to make a good faith assessment of validity.
Crafting Your Response
If you confirm merits to allegations, own up to it. Express regret and commit to corrective actions like restating financials or improving controls.
If claims are unfounded, clearly refute them with facts. Be thoughtful in tone – avoid attacking accusers but firmly defend your position. Disclose investigation details demonstrating the thoroughness of your review.
In both cases, emphasize your commitment to integrity, transparency and protecting shareholder interests. Outline specific steps to prevent future issues. Ongoing, open communication is key.
Seeking Legal Counsel
Navigating securities fraud allegations is complex. Experienced legal counsel is critical in developing your response strategy. Key considerations in choosing representation:
- Securities litigation expertise – Ideally from a firm known for defending securities class actions and SEC inquiries. They will understand the nuances of fraud claims, investigation protocols, and defense strategies.
- Crisis PR capabilities – Managing external communications is crucial. Ensure your lawyers work closely with PR advisors or have such expertise internally.
- Accounting investigation experience – Assessing accounting irregularities requires forensic accounting skills. Choose lawyers experienced in working with auditors/experts on such reviews.
Lawyers serve as quarterbacks in developing a comprehensive response plan – investigating claims, interfacing with regulators, managing disclosures, and coordinating across advisors like auditors and PR consultants.
Avoiding Future Issues
Beyond addressing immediate allegations, work to prevent future missteps. Consider changes like:
- Reviewing accounting policies & procedures
- Increasing finance team training on GAAP
- Enhancing internal controls and oversight of financial reporting
- Updating codes of conduct/ethics policies
While painful in the moment, allegations often spark needed improvements. Use it as an opportunity to build an even more upstanding, resilient company.
In Summary
Securities fraud allegations related to accounting can disrupt business momentum and strain stakeholder trust. With good counsel and crisis discipline, companies can effectively investigate claims and respond in a way that upholds integrity. The process also serves as a catalyst for positive changes – enabling teams to learn and emerge stronger.
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