FBI Executive Asst. Director Ashley on Interrnal Audits and FBI Priorities

Institute of Interntal Auditors addressed by FBI's Ashley during fraud seminar


The FBI is working to investigate all these crimes and bring perpetrators to justice. Much of that work is done behind the scenes and is not reported on the front pages. While many Americans are aware of these issues, they have not exploded on to the American consciousness in the dramatic way that corporate fraud did back in the summer of 2002.

Enron. Tyco. WorldCom. Adelphia. One after another, extensive and deceptive corporate fraud schemes were revealed. Stocks tumbled. Each revelation of corporate malfeasance further shook investor confidence. Even honest corporations fell under the shadow of suspicion.

To give you a sense of the scope of the problem, the number of corporate fraud cases the FBI has opened has increased over 300 percent between 2001 and 2005. At last count, we had 18 investigations in which investors have lost at least $1 billion. Two of these individual investigations represent $80 billion crimes.

The FBI investigates corporate fraud in publicly traded companies in which corporate insiders knowingly and willingly use improper accounting techniques in an effort to meet street analyst expectations. The schemes are typically contrived to overstate revenue and the related overstatement of earnings per share. I thought you probably hadn't heard enough technical terms today, so let me tell you a little about the six most common schemes that we see - in no particular order of prevalence.

The first is "phony sales," or making journal entries to book a sale that never took place.

The second is "parked inventory sales," or recording revenue for goods shipped to a location controlled by the seller, such as a warehouse or parking lot, to provide the appearance that a sale has occurred.

The third is "swap transactions," in which two companies conspire to exchange payment or service simply to inflate revenue.

The fourth is "channel stuffing," which is quite different from channel surfing. Channel stuffing involves overselling products to customers, resellers, or distributors, with an unwritten agreement that the customer will receive a discount on the full price at some point in the future.

The fifth is "accelerated revenues," or booking revenue in the current period which should be deferred until the earnings process is complete. Examples would be billing for an unshipped product or overestimating the percentage completion on a long-term construction contract.

And the sixth scheme we commonly see is "side deals," in which a seller books a sale, with an unwritten understanding that the buyer has the right to cancel the sales contract and return the product or get a full rebate in the future.

And on the expense side, corrupt companies will often capitalize and/or defer expenses, in order to impact earnings per share without affecting the revenue line--thereby meeting analyst expectations.

These are just some of the trends the FBI investigates. I've described them in very basic terms, but as you know, corporate fraud cases are incredibly complex, wide in scope, and extremely sensitive. And it is not just corrupt CEOs or managers who are affected. Individual shareholders, employee pension plans, mutual funds, financial institutions, and the securities markets have all felt the aftershocks.

I was heading up the FBI's Criminal Investigative Division at the height of corporate scandal season and lost many a night's sleep contemplating the consequences of approving investigations into giant, powerful corporations. It is a no-miss game: If you are wrong, you will damage reputations, hurt workers and investors, and impact the marketplace. And the same is true if you are right. But that's why the FBI has the responsibility for corporate fraud and public corruption investigations. Like internal auditors, we are one of the few agencies that is independent and can make the tough calls.