Federal Accounting Fraud Crimes

Accounting fraud is closely tied to securities fraud. Indeed, most accounting fraud occurs to affect the performance of publicly traded corporations. One of the more famous instances involving accounting fraud is the collapse of Enron. Along with securities violations, money laundering charges may be brought against a defendant. The distinguishing characteristic placing these offenses into the accounting world is that the individual charged is an accountant or agent for an accounting firm and is acting within the scope of his or her employment.

The key elements may be either violations of federal law under today's applicable statutes include such acts as: 1) insider trading, 2) buying or selling securities not registered with the Securities and Exchange Commission (SEC), 3) willfully making false statements or omissions of fact in documents filed with the SEC, and/or 4) engaging in interstate communications with prospective purchasers of securities, where such communications employ any device, scheme, or artifice to defraud, or contain false statements or omissions of fact calculated to mislead or converting money or property gained from illegal activities into money that appears to have been legally earned.

18 U.S.C. § 1520 (2007)
The Requirements
Under section 1520, any accountant who conducts an audit of an issuer of securities to which 15 U.S.C. § 78j-1(a) applies, must maintain all audit or review work papers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded. 18 U.S.C. § 1520(a)(1).

Furthermore, the Securities and Exchange Commission shall promulgate, such rules and regulations, as are reasonably necessary, relating to the retention of relevant records such as workpapers, documents that form the basis of an audit or review, memoranda, correspondence, communications, other documents, and records (including electronic records) which are created, sent, or received in connection with an audit or review and contain conclusions, opinions, analysis, or financial data relating to such an audit or review, which is conducted by any accountant who conducts an audit of an issuer of securities to which 15 U.S.C. § 78j-1(a) applies. The Commission may, from time to time, amend or supplement the rules and regulations that it is required to promulgate under this section, after adequate notice and an opportunity for comment, in order to ensure that such rules and regulations adequately comport with the purposes of this section.

The Punishment
The Punishment for a knowing of willful violation of section 1520(a) is
- a fine, imprisonment for not more than 10 years, or both. 18 U.S.C. § 1520(b).

Case Law Interpreting Section 1520
Because section 1520 was recently enacted, there is no published case law interpreting it.

15 U.S.C. § 78j (2007)
It is a violation of section 78j for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-
- to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in 15 U.S.C. § 78c),
- - any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. §78j(b)

Case Law Interpreting Section 78j
To state a claim under section 78j, a plaintiff must allege (1) the defendant made an untrue statement of material fact or failed to state a material fact; (2) the defendant made the misrepresentation in connection with the purchase or sale of a security; (3) the defendant made the misrepresentation with scienter; and (4) the plaintiff relied on the misrepresentation and sustained damages as a proximate result of the misrepresentation." United Int'l Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000) (interpreting statute in civil case). When the SEC brings a case against a defendant, it is "required to 'show that there has been a misstatement or omission of material fact, made with scienter.'" Ponce v. SEC, 345 F.3d 722, 729 (9th Cir. 2003) (quoting SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996). In a different case, the SEC was forced to prove "the following elements: (1) a material misrepresentation, (2) in connection with the purchase or sale of a security, (3) scienter, and (4) use of the jurisdictional means." SEC v. C. Jones & Co., 312 F. Supp. 2d 1375, 1379 (D. Colo. 2004)

18 U.S.C. §§ 1956 & 1957
Please consult our "money laundering" page on our website for more information on the elements of money laundering.

Case Law Interpreting Accounting Fraud and Money Laundering
Appellant accountant compiled three volumes of sources relevant to defrauded bank's duties under the Community Reinvestment Act and gave a seminar on the same subject. For these services, she billed defrauded bank over $425,000 in a series of invoices beginning in April of 1988. Appellant accountant's co-defendant, who was involved with a recapitalization plan for the defrauded bank, approved most or all of her invoices. Appellant accountant deposited the money generated by the defrauded bank's checks into her First City Bank account and moved the funds into a Worth checking account in the name of Allen & Associates. She then transferred to co-defendant well over one fourth of the money she earned. The money laundering allegedly concealed the proceeds of the misapplication of fund derived from a conspiracy. The funds at issue in each of the transactions became proceeds at the moment the money left the control of First City Bank and was deposited into an account of a consultant or borrower. United States v. Allen, 76 F.3d 1348 (5th Cir. 1996).

The Punishment
Any willful violation of the securities laws of the United States can result in
- a fine of not more than $5,000,000 ($25,000,000 if a corporation)
- imprisonment for not more than 20 years, or
- both. 15 U.S.C. § 78ff.