The Operational Downfalls and Shortcomings:. Generally the term fraud is meant as a generic overview and can encompass many different types of fraud that are deliberate acts meant to deceive or mislead someone that can result in personal, physical, or financial harm. This act of fraud or intentional deception can be separated and differentiated in a number of different ways depending on the nature of the act and who committed the act.
Take for example when fraud is committed by an individual in the form of embezzlement or theft, this type of fraud has a different classification than the type of fraud that is committed by the management team of a company where the management team falsifies or knowingly and inaccurately reports incorrect information on the financial statements of the company. The first example is known as employee fraud and the second example is known as management fraud. There are multiple types of fraud that are segmented by the people who commit the fraud, the type of fraud, and the victims or people who are negatively affected by the fraud that has been committed.
The employee either directly or indirectly steals money or other items of value from the business that the work for. Customers will try to scam sellers into giving the customers something they should not have or scamming the business into not charging the customer. People who rely on financial statement information such as investors, banks, and other lenders.
The management team of a business allows for misrepresentation, of the financial information. Organizations or individuals who sell goods and services directly to other businesses.
Businesses or other organizations that purchase goods and services on a B2B channel. Organizations will over change the business that the sell to or not even ship the good even though payment has already been made. People trick other investors in giving them money for an investment that is either not financially sound or does not exist at all. Generally when the business owners or managers of a company report false financial data it is referred to as financial statement fraud.
For the most part financial statement fraud is generally committed with the goal that if there is an audit of the financial statements then no misappropriations or material misrepresentations will be caught by the auditor or auditing team. As technology increases and financial transactions take place in greater volume and at a more frequent rate it can be difficult to accurately and thoroughly monitor against financial statement fraud.
As stated earlier in the article financial statement fraud can be defined as the intentional or deliberate wrongful act committed by a person or persons inside the company through the use of false or misleading information in the financial statements which result in a form of harm or injury to creditors, investors, and potentially employees.
These acts are usually committed by the financial management team and are considered to be well-masked schemes that are not immediately discernable as financial statement fraud. Listed below are four common fraudulent schemes that companies have used before. The Overstatement of the Assets - The assets of a business can be overstated by not logging the accounts receivables or by not reporting the assets with any depreciated or impaired values, or the items in the inventory that are considered to be obsolete of no value.
The Understatement of Liabilities - The liabilities of a business can be understated by improperly recording the liabilities as equity or it can be done by moving the liabilities between short-term and long-term classifications.
The Overstatement of Revenue - The revenues for a business can easily be overstated by the use of inflated sales. This is generally accomplished by entering in fake sales that never happened or it can be done in a more deceptive fashion by entering in a sale into the financial records before the revenue from the sale is actually earned.
The Understatement of Expenses - Expenses can be understated by holding the expenses the business incurred in one period over to the next accounting period. This can easily happen by improperly capitalizing an expense over multiple accounting periods rather than correctly expensing it immediately. One Time Expense Mischaracterization - The management team of a company may remove one-time expenses from the accounting records, which thereby gives investors and other people the false impression regarding the results from operations for the business to the participants in the capital markets.
The Misrepresentation of Information - The management team or individuals inside the company can either omit or misrepresent certain types of financial information to present a healthier overall appearance for the business. Often times many people who are trying to commit financial fraud will just omit certain items from their reports.
The Improper Use of Reserve Accounts - There are reserve accounts that hold reserves for things such as the accounts receivables, obsolete inventory accounts, returned sales accounts, and warranties. These accounts can be notoriously difficult to discern because a substantial amount of judgment and knowledge of the business is required in order to determine the proper balances at the end of the accounting period.
Just like every system there are still loopholes, which can be exploited for those people who are looking to intentionally commit financial statement fraud. Financial statement fraud is considered to be a deliberate and wrongful act where the perpetrator has the intent to deceive. With this intent there is generally some sort of basis for rational or justification for their actions, along with the right conditions present inside of the business that would allow the fraud to be committed. Financial statements that have been thoroughly audited and certified are meant to be trustworthy.
These financial statements are also regarded as being less accurate than audited ones. Accounting reliability refers to whether financial information can be verified and used consistently by investors and creditors with the same results. Basically, reliability refers to the trustworthiness of the financial statements.
Reconcile your accounting records with external records, such as bank statements, supplier invoices, credit card statements and other documents. The numbers should match. For example, the cash balance on your balance sheet should match the ending balance on your bank statement. Nonfinancial matters are not a part of the audit process, unless there is relevance to the financial statements.
The auditing of financial statements intends to offer reasonable assurance that the statements are accurate. Vertical analysis provides a way to compare different companies. Ratio analysis can be used to provide information about a company's performance. There are generally six steps to developing an effective analysis of financial statements.
Identify the industry economic characteristics. Identify company strategies. Assess the quality of the firm's financial statements. Analyze current profitability and risk. Prepare forecasted financial statements. Value the firm. Manipulating financial statements to achieve a set outcome has catastrophic risks, for the directors and for everyone involved. Such acts have been known to result in companies going bust, which then turns into a loss of jobs, people's lives being turned upside down and an impact on the overall economy.
Accurate financial statements are also essential to catch costly mistakes or internal wrongdoing early on in the process. Keep a historical record or your balance sheet and compare the data month over month. A snapshot view is great for a quick assessment, but if you want to avoid discrepancies, you need to look at the whole story. When a CEO lacks the financial knowledge to catch nuances in their statements, they are unable to take corrective action to change the results.
For example, knowing what you sell beyond the widget is a critical step to calculating your true assets. The numbers on the page are clues. When you learn to read the clues with the big picture in mind, you are better positioned to make sound business decisions. Failing to understand variances, overreacting to numbers on a page, and not catching insufficient and inaccurate data are clear indications that you are a good candidate for external help.
Financial statements can be misleading.
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