Financial Statement Fraud has emerged as a major problem in the present days. The instances of corporate fraud is increasing at an alarming rate despite formulating laws pertaining to the act of fraud.
Many people including the creditors, shareholders, investors have suffered a lot due to the financial statement fraud. All of these people have been deceived by the fraudulent report prepared by the concerned companies. A major impediment towards tracing the frauds is that they cannot be recognized instantly but need an experienced eye to trace them. This kind of fraud is difficult to discover since it is often managed by the management. These mostly get recognized when the company is going through any kind of financial crisis otherwise they are hidden from the eyes of the auditors, investors and stakeholders. Corporate frauds might result in a takeover.
According to a survey conducted by the Association of Certificate Fraud Examiners in 2005 it was revealed that most of the companies indulged in the frauds are small-scale companies with less employees. This revelation breaks the popular notion that the large companies are indulged in frauds.
Conditions Leading to Fraud:
According to a famous criminologist fraud occurs due to certain circumstances. The factors culminating into fraud are:
Opportunity and Pressure are the two factors which are widely spread in the corporate sector these days. The opportunity to commit fraud can occur due to managerial loopholes, lack of organizational security. The pressure to make it big in the corporate world is a very important reason leading to fraud. Meeting the expectations of the Wall Street is one of the major reason of fraud because every company wishes to bit numbers at the Wall Street. Rationalization is the factor which could be explained by the study of human psychology.
Most Common Forms of Fraud:
According to a survey report published by the ACFE in 2006 the most common form of fraud which a company indulges in is asset misappropriation, this type of fraud accounted for 91.5% of corporate frauds, followed by bribery, extortion, conflict of interests which accounted for 30.8% of corporate frauds. Changing numbers in the financial statements is the least committed fraud in the corporate sector. The company has to face a huge loss in case it indulges in the last instance more than what it has to bear for the former ones. All these are punishable offenses. In case of asset misappropriation the company has to deal with the loss of faith on the part of the investor, negative reputation and penalty.
Instances of Fraud and Warning Signals
The most common forms of fraud are overstating revenue, understating expenses, misappropriation of assets. There are certain signals which the company has to recognize to understand the status of the company. The red flag is one such signal. It can be utilized by the shareholders and auditors to assess the risk of fraud. The red flag situation depicts danger for the company. However, the signal of red flag symbolizes different types of danger for different people like the auditors, investors and creditors.
Consequences of Fraud Identification
The identification of fraud leads to informing the audit committee and forensic accountants. But before appointing a forensic accountant the experience and efficiency of the accountant needs to be assessed.
The SEC and Sarbanes-Oxley Act of 2002 have formulated rules and regulations to abolish fraud from the industrial scenario. But unfortunately despite such bindings corporate fraud is increasing day by day.
Last Updated on : 26th June 2013