Accountants & Financial Statement Fraud

Wednesday, November 23, 2016 Print Email

Fraud is an intentional act by one or more persons, involving the use of deception to gain an unjust or illegal advantage. Fraud is distinguished from error. The error results from a genuine mistake or omission and is not intentional. Two types of fraud have been occurred in financial statements by accountants: Fraudulent financial statement and misappropriation of assets.

Fraudulent accounting entries always affect at least two accounts and, therefore, at least two categories on the financial statements. It is common for fraud schemes to involve a combination of several methods. The recording of fictitious revenues e.g. premature revenue recognition, fabricating project accounting, channel stuffing and trade loading, expense recording in the wrong period, inventory valuation, fictitious/irrecoverable account receivables, unrealistic estimates, assets valuation, asset misclassification, understatement of assets. On another hand, there is concealed liabilities and expenses in following ways i.e. liability/expense omission, subsequent event concealment, capitalized expenses.

International Financial Reporting Standards (IFRS) and local Laws (Companies Ordinance) requires that financial statements should disclose all the information necessary to prevent a reasonably discerning user of the financial statements from being misled. The notes should include narrative disclosures, supporting schedules, and any other information required to avoid misleading potential investors, creditors, or any other users of the financial statements. Improper disclosure related to financial statement fraud may be due to failure to disclose loan covenants, contingent liabilities and failure to disclose material information affecting company going concern. Related-party transactions are sometimes referred to as “self-dealing. There is nothing wrong with it as long as they are fully disclosed. If transactions are not conducted on arm’s length basis, the Company may suffer economic harm, affecting stockholders.

Generally, three types of accounting changes must be disclosed to avoid misleading the user of financial statements: accounting principles, estimates and reporting entities. The fraudster may fail to properly retroactively restate financial statements for a change in accounting principle if the change causes the company’s financial statements to appear weaker. Likewise, they may fail to disclose significant changes in estimates such as the useful lives and estimated salvage values of depreciable assets, or the estimates underlying the determination of warranty or other liabilities. 

Source: ReadyRatios

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