Investors’ confidence and reputation are valuable and priceless assets to all companies, therefore maintaining those assets require an investment in fraud detection within financial reporting.
Fraudulent Financial Reporting is a scam that is increasing every year in large numbers and percentages. The presence of fraudulent financial reporting begins with pressure or opportunity. Pressure arises from goals not being met or from the “tone at the top,” while opportunity is due to lack of internal controls and security.
According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), revenue fraud increased from 50 percent of all cases to 60 percent of all cases between the two 10-year studies (1987-2007). The U.S. Securities and Exchange Commission (SEC) names the CEO and/or CFO for some level of involvement in 89 percent of the fraud cases.
Fraud affects all company sizes and normally is detected through the following red flags:
Complex or unstable organizational structure
Significant cash flow changes
Improper revenue recognition
Recording fictitious revenues or assets
Asset overstatements and/or expenses understatement
False acquisitions or netting amounts of miscellaneous items
Disguised transactions through related parties
It is highly recommended to implement controls, policies, and procedures to prevent and/or detect fraud before it occurs, such as:
Implement internal controls for segregation of duties for postings and authorization
Implement a fraud policy and fraud hotline
Form an independent audit committee
Improve the “tone at the top” that demonstrates ethical behavior for the entire company
Schedule annual examinations and audits of financial statements by an outside party
Executing the recommendations are the first steps to reducing, preventing, and detecting fraud within your company’s financial statements. Consistency in controls and policies will aid in catching them before it is too late.