Understanding Financial Statement Fraud And Financial Statements

Throughout history and in our own time, legitimate accounting methods have been utilized to fraudulently engage in manipulating activities that results in illicit gains to the perpetrators and losses to individuals and financial institutions.

Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay

The author in the story "The Mustang Times" uses rhetorical devices such as loaded language, anecdotes, facts, and statistics to try to persuade the reader into reconsidering competition in schools. The author uses these rhetorical devices to help convince the reader to change the school culture to a less stressful environment for students. As well, the adage is a bit spooky. The author uses loaded language throughout the story to help convince the reader to reconsider competition in school by using emotions to help appeal to their audience.

Companies create complex accounting schemes to boost revenues to make investors think that the stock price of that actual company holds the price that the company is falsely promoting, to create a false expectation for investors to keep investing large amounts of money in their stocks and generate profit from that false practice. An example of fraudulent practices against company and client investors was the case of Bernard Madoff from Bernard L. Madoff Investment Securities LLC. which committed decades of long fraud. (Stempel, 2015). Bernard Madoff plead guilty in 2009 and was sentenced one hundred fifty years of incarceration.

The case study analyzes Crazy Eddie. Crazy Eddie was convicted of white collar crime through fraud triangle. Crazy Eddie involved in fraud through incentives, opportunity and rationalization. Crazy Eddie reported lacking rationalization but confirmed that incentives and opportunity were working. The company also reported lacking morality and excuses. Crazy Eddie executed its business without taking into account moral implications of doing business. Crazy Eddie illegally adjusted returns to avoid paying excessive tax thus faulting the federal government millions of dollars (Foderaro, 1998). Crazy Eddie paid workers off books to avoid compiling tax returns. Crazy Eddie administrators worked closely with external and internal auditors on reaching consensus about their illegal financial dishonest. Crazy Eddie overstated income to the public to attract people dumb stock at inflated prices using a variety of tricks. There were cases of money laundering aimed at increasing revenue reports to attract investors. Crazy Eddie inflated inventory assets to increase earned revenue. There were also cases of cut-off fraud that were done through decreasing accounts payable liabilities to increase reported returns. Debit memo was also practiced. The company’s financial records indicated fictitious purchase discounts and trade allowances to send customer friendly image against competitors.

Internal fraud consists in “a type of fraud that is committed by an individual against an organization. [Furthermore], a perpetrator of fraud engages in activities that are designed to defraud, misappropriate property, or circumvent the regulations, law, or policies of a company”[8]. Not only has the incidence of internal fraud increased in frequency because of the availability of sensitive information such as client details or confidential business documents; moreover, this type of fraud is found in various types of organizations, ranging from corporations, public service institutions and financial institutions. Our analysis will concentrate on the most common and prolific types of internal fraud, namely identity theft, insider trading, loan fraud and wire fraud. Interestingly, PriceWaterhouseCooper conducted a survey that revealed that the “demographics of a typical fraudster are as follows: males (85% of cases), 31-50 years (72% of cases), reached high-school level (50%), Bachelor’s or post graduate degree (50%) and middle or senior management (52%)”[9].

Three conditions are necessary for financial statement fraud to occur. There must be (1) an incentive to commit fraud. (2) the opportunity to commit fraud, and (3) the ability to rationalize the misdeed. These conditions make up what antifraud experts call the fraud tringle (Libby, Libby, & Short, 2017, p 232). Some well-known names come to mind when I think of financial fraud (e.g. Bernie Madoff and his $50 billion Ponzi Scheme, WorldCom. Arthur Anderson). Also, the Sarbanes-Oxley Act of 2002 (SOx) comes to mind. SOx was a law that was implemented to oversee

In Australia finance executives manipulate the financial records by using cookie jar reserve to inflate profits and fail to record expense. The Australian company overstated operating income in 2009 by 5% to meet analyst earning target. The CFO Wayne Banks agree to settle the charge and pay “disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years (SEC, 2015).” In CSC Nordic region and Denmark, it was also found that senor executive used financial manipulation and fraud to inflate operation results in the HNS

This subject company in this case study is WoolEx Mills. The top management team at the Mills had to act fast to prevent the accusations charged upon them, so that they may venture deep into the United States market. In the process, they had to act in a way that will present the company’s financial statements; cash flows in a way that they did not show any suspicious fraudulent activities. The type of fraud in this case study is known as manipulation of accounts which involves the act of offering the accounts in the way they are not in reality.

There were 347 alleged cases of fraud involving public company according to Fraudulent Financial Reporting: 1998-2007 sponsored by Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2010) that were investigated by Securities and Exchange Commission (SEC) on May 2010, which is showing 53 increased in the number of fraud when compared to the 1987-1997 study (p.5). COSO’s result is a sad number in a 10 year period, which averaging close to 35 accounting frauds a year (p.5). COSO’S study shows out of the nearly 350 financial frauds investigated 60% were identified to involved improper revenue recognition and 89% were recognized the CEOs and/or CFOs involvement (p.5). COSO’s research

On the other side, fraudulent reporting is about the deliberate action for issuing a misleading financial statements. The purpose is to conceal the real performance and negative picture of business. However, the management is intention to conceal the actual performance of the company regardless the legal and legitimate practices by its financial statements.

Excello Telecommunications has a history of excellent performance but with a surge in oversea competitors the company may not be able to meet its financial estimates for the first time. Executives were worried that not being able to meet the financial estimates could impact stock options, bonuses, and the share price of company stock.

Financial statement fraud is usually a means to an end rather than an end in itself. When people "cook the books" they may doing it to "buy more time" to quietly fix business problems that prevent their entities from achieving its expected earnings or complying with loan covenants (Fraud Magazine, 2014. It may also be done to obtain or renew financing that would not be granted or would be smaller if honest financial statements were provided. People intent on profiting from crime may commit financial statement fraud to obtain loans they can then siphon off for personal gain or to inflate the price of the company 's shares, allowing them to sell their holdings or exercise stock options at a profit (Fraud Magazine, 2014). However, in many past cases of financial statement fraud, the perpetrators have gained little or nothing personally in financial terms. Instead the focus appears to have been preserving their status as leaders of the entity - a status that might have been lost

Some industry-specific factors, such as having valuable near-cash assets, can increase the organization's vulnerability. Also they will need to rationalize the actions as justifiable. The individuals committing the fraud must first convince themselves that their behavior is acceptable or will be temporary. For example, Barry Minkow’s believed that the lies and deceit are for the betterment of his company and that with time everything will eventually return to normal.

The authors wrote this article to study the relative effects of threats of incarceration, fines and professional censure on attitudes about committing financial statement fraud. It is important to consider that deterrence mechanisms are most effective in the context of financial statements fraud given that financial statement fraud is by far the most costly and difficult to detect. It causes a median loss of $4.1 million per incident and takes the longest to detect at an average of approximately 27 months (ACFE, 2010).