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    Fin STM Fraud 2

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    Okwuchi Alaukwu
    Financial statement fraud involves the deliberate misrepresentation of a company's financial condition through misstating or omitting amounts in financial statements. It is often done by overstating assets, revenues, and profits or understating liabilities, expenses, and losses. Common methods include improper revenue recognition, expense manipulation, non-recognition of liabilities, and improper cash flow presentation. Major accounting frauds like Enron, WorldCom, and Tyco involved such practices as misstating revenues and expenses. The Sarbanes-Oxley Act was passed in 2002 in response to such frauds to improve financial reporting reliability and audit effectiveness.

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    Fin STM Fraud 2

    Uploaded by

    Okwuchi Alaukwu
    44 views6 pages
    Financial statement fraud involves the deliberate misrepresentation of a company's financial condition through misstating or omitting amounts in financial statements. It is often done by overstating assets, revenues, and profits or understating liabilities, expenses, and losses. Common methods include improper revenue recognition, expense manipulation, non-recognition of liabilities, and improper cash flow presentation. Major accounting frauds like Enron, WorldCom, and Tyco involved such practices as misstating revenues and expenses. The Sarbanes-Oxley Act was passed in 2002 in response to such frauds to improve financial reporting reliability and audit effectiveness.

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    Financial statement fraud involves the deliberate misrepresentation of a company's financial condition through misstating or omitting amounts in financial statements. It is often done by overstating assets, revenues, and profits or understating liabilities, expenses, and losses. Common methods include improper revenue recognition, expense manipulation, non-recognition of liabilities, and improper cash flow presentation. Major accounting frauds like Enron, WorldCom, and Tyco involved such practices as misstating revenues and expenses. The Sarbanes-Oxley Act was passed in 2002 in response to such frauds to improve financial reporting reliability and audit effectiveness.

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    44 views6 pages

    Fin STM Fraud 2

    Uploaded by

    Okwuchi Alaukwu
    Financial statement fraud involves the deliberate misrepresentation of a company's financial condition through misstating or omitting amounts in financial statements. It is often done by overstating assets, revenues, and profits or understating liabilities, expenses, and losses. Common methods include improper revenue recognition, expense manipulation, non-recognition of liabilities, and improper cash flow presentation. Major accounting frauds like Enron, WorldCom, and Tyco involved such practices as misstating revenues and expenses. The Sarbanes-Oxley Act was passed in 2002 in response to such frauds to improve financial reporting reliability and audit effectiveness.

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    Manipulation of accounts means falsifying figures in books of accounts

    with the object of reporting net income more or less than what actually it
    is, or for making balance sheet figures to appear more or less attractive
    than what actually they are. Directors may be interested in reporting a
    higher net profit in order to win shareholders' confidence or to earn more
    commission if they are entitled to a commission on profits or to fetch better
    price for the shares they hold. In order to show inflated profits such
    methods are employed as inflating sales, suppressing purchases, writing
    off inadequate depreciation, providing inadequate provision for bad debts,
    etc. On the other hand, management may be interested in showing a net
    profit less than the company actually earned. The intention for doing this
    may be to deceive tax authorities or to buy shares of the company at a
    low price. In order to show lower profits management may employ such
    methods as suppressing sales, inflating purchases, making excessive
    provisions for depreciation and bad debts, etc. Manipulation of accounts
    is done by director and top management; therefore, for the auditor it is
    very difficult to detect it.

    Financial statement fraud is increasingly becoming a problem in


    corporate America today. Read on to know more about financial
    statement fraud, how is it accomplished, the big accounting frauds in
    history and the Sarbanes-Oxley Act of 2002.

    Financial Statements and Their Users

    Consider yourself in the person of a potential investor. You have excess


    funds and you want to put your money in a profitable firm by buying
    shares of the company. In the future, you hope to get returns in the form
    of dividends and increase in the market value of your purchased stock.
    You have several potential companies in your mind and to evaluate your
    options, you look into their financial statements. By looking and
    analyzing their financial statements, you will be able to properly assess
    their profitability, cash flows and other performance indicators. This will
    help you predict their ability to pay future dividends as well the likelihood
    of an increase or decrease in stock value. However, you can only do this
    if the reliability of financial statements is assured. You need confidence
    that those financial statements you rely upon accurately present the
    financial position, performance and cash flows of these companies.

    Reliability of financial statements is threatened by financial statement


    fraud.
    What is FS Fraud?

    Financial statement fraud is the deliberate alteration of the company's


    financial statements in order to mislead the users of financial information
    and create a rosy picture of the company's financial position,
    performance, and cash flows. Typically, financial statement fraud is
    propagated by management to achieve desired objectives. For instance,
    management of a company that is obtaining bank approval for a loan
    may misstate their financial statements to create an impression that they
    can very well pay for such loan. Management of a firm may misstate
    financial statements to make their stock attractive to investors and
    consequently, increase their stock price. Further, management may
    misstate financial statements to justify their bonuses and increased
    salaries. This usually happens when management compensation is tied
    to company performance.

    Big Accounting Frauds in History

    1. Enron. Enron deliberately misstated profits, cash flows and


    understated liabilities with the use of creative, yet questionable
    accounting methods. A disguised loan in 1999 in which the proceeds
    from the sale of bonds was reported as cash from operations. This
    overstated operating cash flow by $700 million. With the use of market to
    market accounting, Enron recognized a very significant amount of future
    earnings as current income. This allowed a certain business unit to
    report quarterly profit of $40 million when in fact, this unit was actually
    operating at a loss. Another loan transaction was understated by $4.85
    billion.

    2. WorldCom. In this case, $3.8 billion of expenses were hidden.


    Revenue expenditures, specifically interconnection expenses, which
    should have been expensed were reported as asset. This led to the
    overstatement of its 2001 net profit.

    3. Parmalat. A €3.95 billion cash fund in the Bank of America reported in


    the company balance sheet was discovered to be actually non-existent
    in 2003. This discovery then led management to announce that such
    amount was missing.

    4. Tyco. Income was overstated by $500 billion. Top company


    executives stole $150 million through unauthorized forms of executive
    compensation.

    How is it Accomplished?
    Financial statement fraud is generally accomplished by the following:

    1. Improper revenue recognition. This may include schemes such as


    double billing of sales, recognizing fictitious revenues, recording
    shipments to company-owned facilities as sales, pre-recognition of
    future sales, etc.

    2. Manipulation of expenses. Expenses are capitalized or charged to


    asset accounts. This can also be done by depreciating and amortizing
    costs too slowly. Such practices overstate income and overstate assets.

    3. Non-recognition of liabilities. This may include schemes such as


    improper off-the-books treatment of certain liabilities, insufficient
    disclosures of contingencies and commitments, disguising loan
    transactions as other transactions, etc.

    4. Improper cash flow presentation. This is done by overstating cash


    inflows of the business, reporting fictitious cash flows, presenting the
    proceeds of loan transactions as part of cash flow from operations, etc.

    Financial statement fraud usually involves overstating assets, revenues


    and profits and understating liabilities, expenses and losses. However,
    the overall objective of the manipulation may sometimes require the
    opposite action.

    Financial statement fraud is the deliberate misrepresentation of the


    financial condition of an enterprise accomplished through the intentional
    misstatement or omission of amounts or disclosures in the financial
    statements to deceive financial statement users.

    Financial statement fraud is usually a means to an end rather than an


    end in itself. When people "cook the books" they may doing it to "buy
    more time" to quietly fix business problems that prevent their entities
    from achieving its expected earnings or complying with loan covenants.
    It may also be done to obtain or renew financing that would not be
    granted or would be smaller if honest financial statements were
    provided. People intent on profiting from crime may commit financial
    statement fraud to obtain loans they can then siphon off for personal
    gain or to inflate the price of the company's shares, allowing them to sell
    their holdings or exercise stock options at a profit. However, in many
    past cases of financial statement fraud, the perpetrators have gained
    little or nothing personally in financial terms. Instead the focus appears
    to have been preserving their status as leaders of the entity - a status
    that might have been lost had the real financial results been published
    promptly.

    Financial statement fraud usually involves overstating assets, revenues,


    and profits and understating liabilities, expenses, and losses. However,
    the overall objective of the manipulation may sometimes require the
    opposite action, e.g., concealing higher-than-expected revenues or
    profits in a good year to help the subsequent year that is expected to be
    tougher.

    A series of big-name frauds in the past decade has been accompanied


    by lawsuits against auditors because of their suspected negligence in
    not detecting the financial statement fraud. As a result, auditors have
    risked the loss of money and what is even more influential, the loss of
    their reputations. This situation has pushed auditors and the related
    organizations and institutions to improve the audit processes in order to
    be more effective in identifying risk and collecting evidence for issuing
    audit opinions on financial statements. According to a study published in
    1999 by the Committee of Sponsoring Organizations of the Treadway
    Commission (COSO), the use of fictitious revenues is the most popular
    method of committing financial statement fraud. As reported by the
    Securities and Exchange Commission
    (SEC) Commissioner, Isaac C. Hunt, Jr., in his speech “Current SE
    C Financial Fraud
    Developments,” “Over half of financial report cases are directly related to
    revenue recognitions”
    (Hunt, 2000). Accounts receivable are attractive fraud targets, primarily
    because of the way receivables are viewed by lenders. Unlike inventory
    or fixed assets, accounts receivable
    –
    in the eyes of financiers
    –
    are the next best thing to cash. Because the mechanics are simple,
    sales/receivables fraud schemes lead the fraudulent financial statement
    pack (Wells, March 2001). In this study, the main problem is to
    investigate the problems and some recommended solutions to financial
    statement fraud in an organization.
    1.3 Objectives of the Study
    The study sought to assess the problems of financial statement fraud in
    an organization. Specifically, the study sought to: 1.
    examine the relationship between financial statement fraud and
    organization performance.

    2.

    examine the consequences of financial statement fraud in an


    organization. 3.

    examine the
    reasons for fraud, types and implication of costs of fraud in an
    organization.
    4.

    suggest possible solutions for detecting and preventing financial


    statement fraud in an organization.
    1.4 Research Questions
    1.

    What is the relationship between financial statement fraud and


    organization performance? 2.

    What are the consequences of financial statement fraud in an


    organization? 3.

    What are the


    reasons for fraud, types and implication of costs of fraud in an
    organization?
    4. What are the possible solutions for detecting and preventing
    financial statement fraud in an organization?
    1.5 Research Hypotheses Ho
    1: There is no relationship between financial statement fraud and
    organization performance.
    Ho
    2: There are no consequences of financial statement fraud in an
    organization.
    1.6 Significance of the Study
    This study will be of immense benefit to other researchers who intend to
    know more on this study and can also be used by non-researchers to
    build more on their research work. This study contributes to knowledge
    and could serve as a guide for other study.
    1.7 Scope/Limitations of the Study
    This study is on problems of financial statement fraud in an organization
    with a view of finding possible solution to it.
    Limitations of study

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