AKUNTANSI

FORENSIK
Financial Statement Fraud
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 Fraud Tree

Source: ACFE, Report to the Nations 2018

© 2011 Cengage Learning. All
Rights Reserved. May not be
© 2011 Cengage Learning. All
Rights Reserved. May not be
© 2011 Cengage Learning. All
Rights Reserved. May not be
© 2011 Cengage Learning. All
Rights Reserved. May not be
Source: ACFE, Report to the Nations 2018
Source: ACFE, Report to the Nations 2018
Source: ACFE, Report to the Nations 2018
Definition
• Financial statement fraud is defined as deliberate
misstatements or omissions of amounts or
disclosures of financial statements to deceive
financial statement users, particularly investors
and creditors.
Schemes
• Financial statement fraud may involve these
schemes:
− Falsification, alteration, or manipulation of material
financial records, supporting documents, or business
transactions
− Material intentional omissions or misrepresentations
of events, transactions, accounts, or other significant
information from which financial statements are
prepared
− Deliberate misapplication of accounting principles,
policies, and procedures used to measure, recognize,
report, and disclose economic events and business
transactions
Fraud in Financial Statements
• Financial statement frauds like the one just
described are caused by a number of factors
occurring at the same time, the most significant
of which is the pressure on upper management
to show earnings.
• Preparing false financial statements is made
somewhat easier by the subjective nature of the
way books and records are kept.
Fraud in Financial Statements
• The accounting profession has long recognized
that, to a large extent, accounting is a somewhat
arbitrary process, subject to professional
judgment.
• The profession also indirectly recognizes that
numbers are subject to manipulation. After all, a
debit on a company’s books can be recorded as
either an expense or an asset. A credit can be a
liability or equity.
Fraud in Financial Statements
• Therefore, there is tremendous temptation when
a strong earnings showing is needed to classify
expenses as assets, and liabilities as equity.
Source: ACFE, Report to the Nations 2018
Source: ACFE,
Report to the
Nations 2018
Perpetrators
• Three main groups of people commit financial
statement fraud. In descending order of
likelihood of involvement, they are:
− Senior management (CEO) and/or chief financial
officer (CFO)
− Mid- and lower-level employees
− Organized criminals.
Reasons
• Senior managers (CEOs, CFOs, etc.) and
business owners may cook the books for several
key reasons:
− To conceal true business performance. This may be
to overstate or understate results.
− To preserve personal status/control. Senior managers
with strong egos may be unwilling to admit that their
strategy failed and that business performance is bad,
since doing so may lead to their termination.
− To maintain personal income/wealth. Executive
might earn more from salary, bonus, stock, and stock
options.
Reasons
The following are some of the more common
reasons why senior management will overstate
business performance to meet certain objectives:
• To meet or exceed the earnings or revenue
growth expectations of stock market analysts
• To comply with loan covenants
• To increase the amount of financing available
from asset-based loans
Reasons
• To meet a lender’s criteria for
granting/extending loan facilities
• To meet corporate performance criteria set by
the parent company
• To meet personal performance criteria
• To trigger performance-related compensation or
earn-out payments
Reasons
• To support the stock price in anticipation of a
merger, acquisition, or sale of personal
stockholding
• To show a pattern of growth to support a
planned securities offering or sale of the business
Reasons
Alternatively, senior management may understate
business performance to meet certain objectives:
• To defer “surplus” earnings to the next
accounting period; if current-period budgets
have been met and there is no reward for
additional performance, corporate managers
might prefer to direct additional earnings into the
next period to help meet their new targets
Reasons
• To take all possible write-offs in one “big bath”
now so future earnings will be consistently
higher
• To reduce expectations now so future growth
will be better perceived and rewarded
• To preserve a trend of consistent growth,
avoiding volatile results
Reasons
• To reduce the value of an owner-managed
business for purposes of a divorce settlement
• To reduce the value of a corporate unit whose
management is planning a buyout
General Methods
• Playing the accounting system.
• Beating the accounting system.
• Going outside the accounting system.
Playing the Accounting System.
• In this approach, fraudsters use the accounting
system as a tool to generate the results they want.
• For example, in order to increase or decrease
earnings to a desired figure, fraudsters might
manipulate the assumptions used to calculate
depreciation charges, allowances for bad debts,
or allowances for excess and obsolete inventory.
Playing the Accounting System.
• To avoid recognizing expenses and liabilities,
vendor invoices might not be recorded on a
timely basis.
• Genuine sales might be recorded prematurely.
• Transactions recorded in the accounting system
have a basis in fact, even if they are recorded
improperly.
Playing the Accounting System.
• There is a documentary trail to support the
results reported in the financial statements,
although the assumptions shown in some of
those documents may be questionable.
Beating the Accounting System.
• In this approach, fraudsters feed false and
fictitious information into the accounting system
to manipulate reported results by an amount
greater than can be achieved simply by playing
the accounting system.
• Fictitious sales might be recorded to legitimate
or phony customers.
• Inventory and receivables might be invented,
with documents later being forged to support the
claimed numbers.
Beating the Accounting System.
• Senior financial management might determine
allowances for bad debts and for excess and
obsolete inventory without regard to the
formulas or methods historically used in the
entity to determine these amounts.
• Journal entries might be disguised in an attempt
to conceal their fraudulent intent (e.g., splitting
big, round-sum adjustments into many smaller
entries of odd amounts), or transactions may be
hidden through use of intercompany accounts to
conceal the other side of a transaction.
Beating the Accounting System.
• Some transactions recorded in the accounting
system may have no basis in fact, and some that
do may be improperly recorded. There will be no
documentary trail to support certain transactions
or balances unless the fraudsters prepare forged
or altered documents to help support this fraud.
Going Outside the Accounting System
• In this approach, fraudsters produce whatever
financial statements they wish.
• These financial statements could be based on the
results of an accounting and financial reporting
process for an operating entity, with additional
manual adjustments to achieve the results desired
by the fraudsters.
• Alternatively, they could just be printed up using
phony numbers supplied by fraudsters.
Going Outside the Accounting System
• In some cases, fraudsters might go back and
enter false data in the accounting system to
support the phony financial statements.
• In other cases, they might not bother, or there
might be no accounting system.
• So not all transactions may be recorded in an
accounting system, and some or all transactions
may have no basis in fact.
Going Outside the Accounting System
• To catch this type of fraud, it is usually necessary
to start by tracing the published financial
statements back to the output of the accounting
system.
• As in the previous situation, there is no
documentary trail to support certain transactions
or balances reported in the financial statements
unless the fraudsters prepare forged or altered
documents to help support this fraud.
Important Issues
• The major concepts include:
− Materiality
− Matching
− Conservatism
− Going concern
− Cost
− Objective evidence
− Consistency
− Full disclosure
Materiality
• Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Concepts No.
2, Qualitative Characteristics of Accounting Information
− Materiality as “the magnitude of an omission or
misstatement of accounting information that, in the
light of surrounding circumstances, makes it probable
that the judgment of a reasonable person relying on
the information would have been changed or
influenced by the omission or misstatement.”
Going Concern
• Fraud in the going concern concept usually
results from attempts by an entity to conceal its
terminal business condition.
• For example, assume a company is in the
computer parts manufacturing business. Last
year the company earned $100,000 after taxes.
This year management is aware that new
technology will make the business totally
obsolete, and by next year, the business will likely
close. This fact might not be known to the
company’s auditors.
Going Concern
• When management prepares the financial
statements for the company, it has the duty to
inform the auditors of any changes in the
business’s future ability to earn money. They in
turn will insist that the financial statements for
the current period reflect this development.
Responsibility
• Financial statements are the responsibility of
company management.
• Therefore, it is hard to imagine that financial
statement fraud can be committed without some
knowledge or consent of management, although
such fraud can be perpetrated by anyone who
has the opportunity and the motive to omit or
misstate the data presented in furtherance of his
or her purpose.
Responsibility
• Financial statement fraud generally is instigated
by members of management at the very least, by
employees under the direction and control of
management.
• In the instances where management does not
investigate suspected frauds, how can it assure
itself that fraud will be prevented and, if fraud
does occur, that it will be detected?
Users of financial statements
• Financial statement fraud schemes are most
often perpetrated by management against
potential users of the statements.
• Financial statement users include company
ownership and management, lending
organizations, investors, regulatory agencies,
vendors, and customers.
• The production of truthful financial statements
plays an important role in an organization’s
continued success.
Users of financial statements
• However, fraudulent statements can be used for
a number of reasons. The most common use is
to increase the organization’s apparent success in
the eyes of potential and current investors. This
not only might induce new investment, but it can
help keep current investors satisfied.
Methods
• Most financial statement schemes can be
classified in one or more of these categories:
− Fictitious revenues
− Timing differences
− Concealed liabilities and expenses
− Improper disclosures
− Improper asset valuation
Example
Example