FINANCIAL STATEMENT FRAUD
Module 1 : Financial Reporting Fraud 💰
Module 2 : Accounting Principles and Fraud 🔖
Module 3 : Fraudulent Financial Statement Schemes
Module 5 : Deterrence of Financial
Statement Fraud ⚠
Module 4 : Detection of Fraudulent
Financial Statement Schemes
Why ❓
How 🔓
Who 👤
Mid- and lower-lever employees
Organized Criminal
Senior Management
To preserve personal status/control
To maintain personal income/wealth
To conceal true business performance
Beating the accounting system
Going outside the accounting system
Playing the accounting system
Conceptual Framework 👨🏻💼
Responsibility for Financial Statements 📓
Users of Financial Statements 👥
Qualitative Characteristics
Recognition and Measurement Concepts
Principles
Constraints
Assumptions
Relevance and Reliability
Comparability and Consistency
Types of Fraudulent Financial Statement Schemes ❌
Types of Financial Statements 📚
Financial Statement Analysis : ✅
Percentage Analysis—Vertical and Horizontal ✏
Vertical Analysis Discussion 🖊
Horizontal Analysis Discussion ✒
Ratio Analysis
The Dupont Expression 👥
Analysis of Cash Flows 📑
Analysis of Nonfinancial Numbers 📚
Reduce pressures to commit
financial statement fraud ❗
Reduce the opportunity to commit
financial statement fraud ‼
Reduce grounds for rationalizing
financial statement fraud ⁉
Maintain accurate and complete
internal accounting records
Establish effective board oversight
of the “tone at the top”
created by management
Board and senior management
should offer their own actions as
examples of appropriate conduct
Avoid setting unachievable
or unreasonable financial goals
Avoid applying excessive pressure on
employees to achieve unrealistic goals
Change goals if changed market
conditions require it
Ensure compensation systems are fair and
do not create unwarranted incentives
to commit fraud
Discourage excessive external
expectations of future corporate
performance
Remove operational obstacles
to effective performance
Carefully monitor the business transactions and interpersonal
relationships of suppliers, buyers, purchasing agents, sales
representatives, and others who participate in the transactions between financial units
Establish a physical security system to secure company assets, including finished goods, cash, capital equipment, tools,
and other valuable items
Divide important functions among employees,
sharing control of onearea
Maintain accurate personnel records,
including background checks on new employees
Encourage strong supervisory relationships and
leadership within groupsto promote
enforcement of accounting procedures
Establish clear and uniform accounting
procedures with no exception clauses
Promote strong values, based on integrity,
throughout the organization
Have policies that clearly define prohibited
behavior with respect to accounting and
financial statement fraud
Provide regular training to all employees and
communicate prohibited behavior
Establish confidential advice and reporting
mechanisms for communicating
inappropriate behavior
Have senior executives communicate to employees
that integrity takes priority and that goals must
never be achieved through fraud
Ensure that management practices what it preaches and
sets an example by promoting honesty in the accounting area. Dishonest acts by management, even if they are directed at someone outside the organization, create an environment of corruption that can spread to other business activities
and to other employees—internal and external
Clearly define the consequences of violating the rules
Cost of Financial Statement Fraud
Defining Financial Statement Fraud
Fictitious Revenues
Timing Differences
Concealed Liabilities and Expenses
Improper Disclosure
Improper Asset Vsluation
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Financial statement fraud is defined as the use of deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors.
Effect Financial Statement Fraud ✅
It jeopardizes the integrity and objectivity of the auditing profession, especially auditors and auditing firms.
It diminishes the confidence of the capital markets, as well as market participants, in the reliability of financial information.
It undermines the reliability, quality, transparency, and integrity of the financial reporting process.
It makes the capital markets less efficient.
It adversely affects the nation’s economic growth and prosperity.
It results in huge litigation costs.
It destroys the careers of the individuals involved.
It leads to bankruptcy or substantial economic losses by the company.
It encourages regulatory intervention.
It is devastating to the normal operations and performance of
companies.
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Red Flags Associated with Fictitious Revenues 🚫
Recurring negative cash flows from operations or an inability to generate cash flows from operations despite reported earnings and earnings growth
Significant transactions with related parties or special-purpose entities not in the ordinary course of business or where those entities are not audited or are audited by another firm
Rapid growth or unusual profitability, especially compared with other companies in the same industry
Significant, unusual, or highly complex transactions, especially those close to period end, that pose difficult “substance over form” questions
Unusual growth in the number of days’ sales in receivables
A significant volume of sales to entities whose substance and ownership are not known
An unusual surge in sales by a minority of units within a company, or in sales recorded by corporate headquarters
Methods for concealing liabilities and expenses:
Capitalized expenses
Failure to disclose warranty costs and liabilities
Liability/expense omissions
Red Flags Associated with Concealed Liabilities and Expenses 🚫
Unusual increase in gross margin or margin in excess of industry peers
Allowances for sales returns, warranty claims, and so on that are
shrinking in percentage terms or are otherwise out of line with industry peers’ results
Nonfinancial management’s excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates
Unusual reduction in the number of days’ purchases in accounts payable
Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate
Reducing accounts payable while competitors are stretching out
payments to vendors
Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth
Improper disclosures relating to financial statement fraud
Management fraud
Related-party transactions
Subsequent events
Accounting changes
Liability omissions
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Accounts receivable
Business combinations
Inventory valuation
Long-term assets
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Revenue Recognition
Long-Term Contracts
Matching Revenues with Expenses
Channel Stuffing
Group 24
Novinda Kurnia Ichsanti 041711333193
Muhammad Iqbal Maulana 041811333083
Annisa Aulia Rahma A. 041811333052