Rising risk of jail time? - Letter to the Editor

Internal Auditor, Dec, 2003 by Dana R. Hermanson

"Getting What They Deserve?" (October 2003), by Russell Jackson, clearly describes the tough new landscape in accounting fraud enforcement. To put current enforcement strategies into perspective, The Committee of Sponsoring Organizations of the Treadway Commission's 1999 Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies, of which I was a coauthor, examined approximately 200 accounting fraud cases. In terms of criminal penalties, from information in U.S. Securities and Exchange Commission (SEC) enforcement releases and searches of the business press, the report identified 27 senior executives who were jailed as a result of their involvement in financial frauds.

The SEC named more than 500 individuals in the enforcement releases related to these 200 frauds (not all individuals were charged with fraud). It appears that the risk of serving jail time for being associated with an accounting fraud was quite low between 1987 and 1997. With the risks so low, and the pressures to make the numbers so high, it's not surprising that accounting fraud exploded in the last few years.

With the backing of the U.S. Sarbanes-Oxley Act of 2002 and widespread public outrage, I expect to see the incidence of jail time in accounting fraud cases jump considerably over the next few years. I have not detected any sentiment that prosecutors are going too far. If anything, the public will continue to pressure regulators for strict accounting fraud penalties.

DANA R. HERMANSON, PHD

Professor of Accounting

Kennesaw State University

Research Fellow

Corporate Governance Center at the

University of Tennessee

Kennesaw, Ga.

dana_hermanson@coles2.kennesaw.edu