Academic journal article Journal of Accountancy

What CPAs Need to Know about Organized Crime: Sophisticated Financial Fraud Seeks to Use, Confuse Accountants

Academic journal article Journal of Accountancy

What CPAs Need to Know about Organized Crime: Sophisticated Financial Fraud Seeks to Use, Confuse Accountants

Article excerpt

EXECUTIVE SUMMARY

* Several indictments in recent years outline how organized crime has infiltrated publicly traded U.S. businesses. Various criminal groups have executed a variety of schemes to defraud investors and government agencies out of hundreds of millions of dollars.

* Among the criminal organizations named in these indictments are the Italian Mafia, the Russian mob and an Armenian-American organized crime ring.

* A federal indictment in New Jersey accuses a group with Maria ties of taking over a publicly traded Texas company and pillaging it into bankruptcy. The alleged conspiracy involved threatening board members to seize control of the company and then using various methods to defraud investors of $12 million.

* Individuals linked to organized crime have to stay behind the scenes from business transactions likely to be scrutinized by internal and external accountants. The criminals often hide their involvement by setting up a maze of easily formed shell companies.

* Organized criminals often have a thorough understanding of audit procedures and know how to disguise their fraudulent activities in company financials. One of the most Popular tactics is to set up a shell company that is paid through a consulting deal with the company being looted. It's difficult to quantify whether consulting or other services have been rendered.

* CPAs performing accounting services for a company, including preparing a company's financial statement, may identify signs of possible fraud, such as vendors or other entities that the company has paid but that list post office boxes as their addresses.

* CPAs who encounter suspicious transactions in the financials may determine to ask questions of management and others to find out the crucial details of the deal. Who approved the transaction? What services were rendered or products purchased? What documentation is there to show that the transaction was legitimate?

* Organized crime specializes in spotting CPAs and other professionals who have a personal vice, such as a gambling problem, or who are willing to compromise their ethics in certain situations. The criminals then use the threat of exposure or even physical harm to push the professional to act as an inside agent who helps execute and hide illegal activities within the victimized business.

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The FBI called it "The Case of the Stolen Company." New Jersey U.S. Attorney Paul J. Fishman said it gave new meaning to the term corporate takeover. An indictment filed in a New Jersey federal court said that a group with ties to La Cosa Nostra (LCN), commonly known as the Italian Maria, "relied on ... threats of economic and physical harm and intimidation" to take over a publicly traded Texas company and defraud shareholders of at least $12 million.

The alleged pillaging of FirstPlus Financial Group (FPFG) is just one example of how the government says organized crime has expanded into increasingly sophisticated financial fraud. This article examines examples of these types of illegal activities, explains how criminals can use knowledge of procedures ordinarily performed by financial statement auditors to hide transgressions and explores warning signs in financial statements that could alert CPAs to the possible infiltration of legitimate businesses by criminal organizations.

"A CRIMINAL'S DREAM"

The FirstPlus indictment, filed late last year, accuses 13 people of seizing power at the Irving, Texas-based financial services company, which eventually filed for bankruptcy. Among those indicted are two men with alleged ties to the Italian Mafia: Nicodemo Scarfo, a member of the Lucchese crime family, and Salvatore Pelullo, an associate of the Lucchese and Philadelphia LCN families. The indictment asserts that a group led by Scarfo and Pelullo falsely accused an FPFG board member of committing financial improprieties with company assets and then threatened to sue the board member unless the individual convinced the other board members to surrender control of FPFG. …

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