Financial Statement Fraud (From ACFE Website)
|Financial statement fraud involves the intentional publishing of false information in any portion of a financial statement. It usually occurs when a company overstates assets or revenue, or when it understates liabilities and expenses. Oftentimes stockholders, employees and investors are kept completely in the dark about the value of corporate assets and the existence of liabilities when such a fraud is taking place.Most of the 2002 fraud-related scandals that resulted in the Sarbanes-Oxley Act – including Enron and WorldCom – were financial statement frauds. Their scams ranged in level of intricacy, but the end results were similar enough: massive stockholder losses and debts to creditors, not to mention trauma to employees who lost their jobs and retirement funds.
In the 2008 Report to the Nation on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners, U.S. companies suffered a median loss of $2 million to fraudulent statement schemes. The report notes that this form of fraud differs greatly from other types of occupational fraud because “the typical goal of a fraudulent statement scheme is not to directly enrich the perpetrator, but rather to mislead third parties (investors, owners, regulators, etc.) as to the profitability or viability of an organization.”
In other words, it is typically perpetrated by company managers who are seeking to enhance the economic appearance of the company by covering enormous debts or other lost assets. Members of management may benefit directly from the fraud by selling stock, receiving performance bonuses, or by using the false report to conceal other illegal acts. Management benefits indirectly from financial statement fraud when the tactic is used to obtain financing on a company’s behalf, or to inflate the selling price of a company.
|Preventing Financial Statement FraudAccording to Dr. Donald R. Cressey’s Fraud Triangle, people commit fraud when they are under financial or social pressure, have an opportunity to gain funds undetected, and can rationalize their actions. Any attempt to prevent financial statement fraud should focus on these three factors:
1. Reduce the Situational Pressures that Encourage Statement Fraud
2. Reduce the Opportunity to Commit
3. Reduce Rationalization of Fraud—Strengthen Employee Personal Integrity