Of the three types of occupational fraud – corruption, asset misappropriation, and fraudulent financial statements – financial statement manipulation has the potential to cause the greatest impact. Just as there are many motives to commit an intentional misstatement or omission of amounts on the face of the financial statements or in the note disclosures, there are also many items forensic accountants, and users of the financial statements, can look for to ensure that they are fairly presented. In this two-part post, I will review the basics of financial statement manipulation, motivations to commit this type of fraud, and how forensic accountants ensure that financial statements are fairly represented.
It is first important to understand some common motivations behind the deliberate misrepresentation of the financial condition or results of operations of an entity. There are situational pressures, such as bonuses that are based on the economic performance of an organization; management may manipulate the financial statements in a way that generates the largest bonus. There may also be pressure to generate a certain financial outcome as required to obtain financing by either overstating the assets or understating the liabilities to appear more liquid.
The first item to verify with financial statements is that assets equal liabilities, plus equity. Of course, to find misrepresentation of statements you have to dig deeper. Below are several ways financial statements can be manipulated and simple ways to detect these misrepresentations:
These are just a few of the ways financial statement fraud is committed. The next post will detail additional misrepresentations including Concealed Liabilities and Expenses, Improper Disclosures, and Improper Asset Valuations, as well as how these manipulations are detected by forensic auditors.
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