Financial Statement Fraud

Financial statement fraud is one of the biggest challenges in the modern business world. This is when corporations engage in certain practices designed to hide or maneuver the accounts of a corporation to help it continue to remain attractive to investors. To counter financial statement frauds, especially in the aftermath of the Enron scandal in 2001-2002, the US Congress introduced the Sarbanes Oxley Act, the compliance with which is mandatory for US corporations. A financial statement fraud may be actionable under both the False Claims Act and the Dodd Frank Act as well. You may have suffered a financial statement fraud or may have original information about a financial statement fraud, which means that you may be able to bring either a financial statement fraud lawsuit or a whistleblower lawsuit depending on the facts peculiar to your case.

The most common occurrence of financial statement fraud is when losses are underplayed or deliberately hidden by corporations. Financial statement fraud comprises deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors, outright 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 and also intentional omissions of disclosures or presentation of inadequate disclosures regarding accounting principles and policies and related financial amounts.

There are massive issues that emanate from financial statement fraud. Financial statement fraud undermines the reliability, quality, transparency, and integrity of the financial reporting processand jeopardizes the integrity and objectivity of the auditing profession, especially auditors and auditing firms. Financial statement fraud diminishes the confidence of the capital markets, as well as market participants, in the reliability of financial information and as a consequence makes the capital markets less efficient. In the bigger picture it adversely affects the nation's economic growth and prosperity, results in huge litigation costs, destroys careers of individuals involved in financial statement fraud and causes bankruptcy or substantial economic losses by the company engaged in financial statement fraud. It causes devastation in the normal operations and performance of alleged companies and erodes public confidence and trust in the accounting and auditing profession. Ultimately financial statement fraud translates to massive stockholder losses and debts to creditors, not to mention emotional trauma to employees who lose their jobs and retirement funds.

Financial statement fraud may be committed by the senior and mid-level management of a corporation to fraudulently enhance the financial health of a business and enrich one's own net worth. Senior management may indulge in fraudulent cover-ups to exceed the earnings or revenue growth expectations of stock market, to comply with loan agreements, to increase the amount of financing available from asset-based loans and to meet a lender's criteria for granting/extending loan facilities. They may also fudge the statements to create a rosy picture for the shareholders.

How do you determine financial statement fraud? Financial statement fraud is designed to rob you of your hard earned earnings primarily to fulfill the ever growing corporate greed. Here are some of the clear red flags that you might want to consider. First and foremost, despite tight cash flows, the company will report profits which mean that gross profit levels will remain high despite pricing pressure. The statement will show that accounts receivable, accounts payable and stock levels are increasing even when sales are declining. Keep an eye out for payments as bonuses to senior management in a down economy. This also is indicative of financial statement fraud.

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Q:What does the term consideration of fraud in a financial statement audit mean?

A:Consideration of fraud in a financial statement audit refers to the specific requirement for an auditor to conduct any audit with the view that a misrepresentation on a financial statement may be the result of a fraud. This is also called professional skepticism. Every auditor is required to assume fraud even when an auditor thinks the management is honest and has never engaged in fraud before.

Q:What are some of the indications of a financial statement fraud?

A:If you think you may be a victim of a financial statement fraud, you need to be on the lookout for certain signs and symptoms. Some of the indications of such a fraud include the following: accounting anomalies, unusual profit or loss, and inappropriate financial actions by management. It is important that you seek legal help in such situations.

Q:What are financial statement fraud cases and what kind of lawyers deal with them?

A:Financial statement fraud cases are cases where financial statements are manipulated by the corporations, brokerage houses or banks to either encourage investors to invest under false pretences or cheat an account holder out of his money. A lawyer specializing in white collar crime pertaining to corporate or securities fraud can help you.

Q:What is the financial statement fraud definition? Does stockbroker fraud also fall under financial statement fraud?

A:Stock fraud or stockbroker fraud may also fall under financial statement fraud definition in certain cases. This happens usually in margins trading or when an unethical stockbroker indulges in unauthorized trades or churning. It is important to see your financial statement to see if you are at the receiving end of a fraud.

Q:The company that I invested my hard-earned savings in might be misrepresenting its financial health. What are the various financial statement fraud examples so I can get a better idea?

A:Mergers and acquisitions are a common way for a struggling company to hide losses to the tune of millions of dollars. Large payouts and golden handshakes given to top executive bosses is a sure-shot red flag that a company is engaging in financial statement fraud. Other examples could include accounting anomalies, flaws and alleged crimes against the company's CEO, inflated profit or growth figures not reflective of the company's products or services or sudden financial actions by senior management.

Q:What is financial statement fraud?

A:Financial statement fraud is defined as misstatement of numbers in financial statement documents. Companies compile financial statements to provide the public and other stakeholders an overview of the revenues and sales. If the figures in the statements are misleading, this would be considered as a financial statement fraud. Stakeholders such as shareholders and tax collectors can file a lawsuit against such companies.

Q:Which methods are employed for conducting a financial accounting fraud?

A:A financial accounting fraud typically makes use of accounting ticks to depict a financially stronger position by overstating assets, profits and revenues. At the same time, to increase the net worth and equity of the company, losses, liabilities and expenses are understated. Sometimes expenditures are overstated and revenues are understated in order to evade taxes.

Q:Can you name some of the warning signs that might indicate the presence of a fraud financial statement for the auditors?

A:Many signs indicate the possibility of a financial statement fraud. Prominent among these are fragile internal control environment, management decisions being dominated by an individual or small group, frequent disputes between senior managers and auditors, and a huge emphasis on earnings and revenue projection. However, these signs only point out the probability that a fraud might be occurring, a significant in-depth analysis in the specific case is required in order to be certain about it.

Q:If I am the victim of fraud in financial statement how should I proceed?

A:In the case that you have suffered due to fraud in financial statement then it is time to bring action against those responsible. For legal proceedings, you may need evidence or proof that you have been wronged. Make sure that you collect as much relevant information as possible because it can help you with your lawsuit.

Q:Can you name some of the real world examples of financial statements fraud cases?

A:There are many recent examples of financial statements fraud. Tyco International Ltd, one of the world's largest conglomerates, posted huge profits through financial manipulations and accounting tricks. Same was the case with the telecommunications company WorldCom. Xerox was convicted for the financial statement misconduct from 1997 to 2000 in order to boost the company's stock price. Some of the other prominent cases include Adelphia, Global Crossing and Parmalat whose CEO was charged with money laundering from 2002 to 2005.

Q:My senior management is involved in fraudulent financial statements but I am afraid to take action. What should I do about the situation?

A:If you think that your senior management is involved in fraudulent financial statements then you need to be very careful as you may get caught for something that you did not commit. If you are thinking of taking legal action, then you must have enough evidence that can prove that your allegations are not baseless. In the event, that you think you may not be able to prove their activities then it is best to stay away from such an organization.

Q:I have suffered monetary loss due to a fraudulent statement issued by my company. Can I file a lawsuit?

A: Yes, if you are a stakeholder in a company and have suffered a loss due to a fraudulent statement issued by the company, you can file a lawsuit. There are a number of law firms that specialize in this area and work towards helping people who are victim to fraud. It is important that you seek legal advice and consult an attorney before going ahead with such a case.

Q:What are the different types of financial statement analysis methods?

A:There are a number of methods used for analyzing financial statements. The method chosen usually depends upon the purpose for analysis. Some of the most common analysis methods are: external analysis, internal analysis, ratio analysis, horizontal analysis, vertical analysis, and static analysis. Statements are usually analyzed to determine the profit or loss, risk factor and overall performance of a firm.

Q:What should be looked for when hiring a financial fraud investigator?

A:To hire a financial fraud investigator you must check the qualification of the person and the experience that the individual has in dealing with such cases. An investigator today must have technical and business background. The technical part helps to analyze evidence such as computer, gadgets, cell phones, gadgets and the business part will help them understand the complexities of operation and to gauge where the fraud could have taken place.

Q:Do you think companies that have regular financial fraud investigation checks gain credibility?

A:Financial fraud investigations are important for any organization. Regular checks build the trust of clients or consumers and also keep the employees vigilant. Companies that efficiently manage bribery, frauds and corruption cases are better equipped to handle crisis situations and can analyze the risks and loop holes in the business processes that lead to frauds.

Q:Can you give me some information about financial institution fraud?

A:When a financial institution such as bank or an insurance company engages in a fraudulent activity, it is referred to as financial institution fraud. There have been numerous cases in which individuals have taken legal action against major financial corporations due to misrepresentation of facts. Many law firms work solely in this legal area and cater to legal issues regarding financial institution fraud.

Q:Can you tell about the most common types of financial reporting fraud cases?

A:There are seven common occurrences that form the basis of financial reporting fraud cases. These include the following: fictitious revenues, overstatement if assets, capitalized expenditures, misappropriation of assets, premature revenues, and understatement of expenses and liabilities. If you suspect you are a victim to a fraud that falls in the category of any of the above, it is important that you seek legal help.

Q:How do investigators make financial fraud detection?

A:Financial fraud detection has emerged as a professional field and these experts have the required training to investigate cases of corruption. They look for misappropriation of financial statements, fictitious sales, incorrect asset values, hiding of liabilities, accounting irregularity, weak system of internal control and untraceable deals or third party transactions.