Financial Statement Fraud

Financial statement fraud is the act of deliberately misrepresenting, misstating or omitting of financial statement data for the purpose of establishing a false impression of an organizations financial strength. The categories that financial statement fraud fall into are improper revenue recognition, manipulation of liabilities, manipulations of expenses, improper disclosures on financial statements and overstating assets.
It could be argued that many people would be needed to be involved in making financial statement fraud occur, including parts of the team preparing the financial statement, assuming an organization is doing its due diligence by separating the duties. The ultimate responsibility of financial statement fraud is that of personnel at the senior management level. In most cases of financial statement fraud, management personnel are aware of it. This could include anyone from the accounting manager to the CEO. Mid and low level employees may also cook the books to hide poor performance in their area or to improve performance pay incentives. Organized criminals may falsify financial statements to obtain loans.
The reasons for financial statement fraud include concealing a business’s true performance, income reasons or to give the impression that a business plan is working. Other reasons may include to meeting loan criteria to improve borrowing power, or as mentioned earlier, performance based pay incentives. Additionally, business’s may hide the true financial condition to either improve stock price or to attract buyers.
The types of schemes involved in financial statement fraud, according to the textbook, are as follows: fictitious revenue, improper asset valuations, concealed liabilities and expenses, timing differenc...

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...commit financial statement fraud include:
• Maintain accurate records.
• Carefully monitor transaction and interpersonal relationships with suppliers, buyers, sales representatives and any others who interface in transactions.
• Establish a physical security system to secure company assets.
• Maintain accurate personnel records.
• Establish uniform accounting procedures with no exception clauses.

Five tactics that can be used to reduce rationalizations of financial statement fraud include:
• Promote strong values, based on integrity.
• Have policies in place the clearly define prohibited behavior.
• Have confidential advice and reporting systems to communicate inappropriate behavior.
• Ensure management is held to the same standards as other employees.
• Clearly communicate the consequences of violating the regulations and punishment of those who commit infractions.