1.0 IntroductionThe highly competitive business environment in the global market has contributed to some corporate executives involving in financial statement fraud in order to redeem the face of the organization before potential investors, and attract new clients. The rate of financial statement fraud within organizations has gone high and is still increasing. This can be seen from highly publicized fraud cases in major world companies such as Enron, Xerox, Global Crossing, WorldCom, and SunBeam. Financial Statement Fraud is one of the commonest kinds of fraud in the corporate and has led to most organizations losing their annual revenue.
Financial statement frauds are most likely to happen because they are important documents that must be seen by investors and creditors when making decisions about investing in a company. Financial statement frauds are involved with low costs and take only a short time to take effect. The purpose of this project report is to give an overview of the financial statement fraud, and highlights the motivation behind, and methods for conducting this fraud, as well as provides recommendations for preventing and detecting future incidences.
2.0 Financial statement fraud overviewA financial statement is usually a written report that contains substantial data of a company’s performance in a given period, usually, quartile, or, annual basis. The statement is a combination of income statement and balance sheet, and can report the cash flow statement. A financial statement is a vital report issued by a company as it reflects its financial health to the market (Hubpages 2011). As such, the financial statement is the most referred to document by investors and leaders in decision-making about investments and lending.
The information in financial statements can sometimes be given in a way that it intentionally misstates the financial position and performance of an organization. This misstatement of financial statements can result from falsifying, manipulating, or changing accounting records. Such intentionally manipulated statements are misleading and can cause devastating problems in the market and the economy. There are several cases of Executives who have served jail terms while others charged with fines for participating in financial statement frauds (Ernst & Young, 2009, p. 1). Financial statement fraud differs in definitions in scholarly and practitioner literatures although the Australian Securities & Investments Commission (ASIC) (2005) emphasize that for it to be fraud, the act must be deliberate and intentional.
The Association of Certified Fraud Examiners (ACFE) (2010) entails that a financial statement fraud involves a misinterpretation or deception made by an entity or individual who knows that it can lead to some unauthorized benefit to the entity or the individual, or a third party. It can also be defined as an act of omission which leads to misleading results portrayed in the financial statement (Rezaee, 2002, p. 2).
Cooper (2005, p. 3) asserts that the deliberate omission or disclosure in a fraudulent act concerning the financial statement is to woe financial statement users, especially investors and creditors. According to the ACFE (2010) report, about 10 percent of financial statement frauds constitute white collar crimes. Financial statement fraud is very costly yet the most common type of fraud committed in companies which has led to concerns and shaken confidence in the financial reporting system and capital markets (Albrecht et al. , 2009, p.
358). This and many other harmful consequences (see Appendix A) occur from financial statement frauds (Rezaee 2002, p. 7).