Financial Statement Fraud: Prevention and Detection

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Sample reports, examples, and documents that promote a real-world understanding of incentives, opportunities, and rationalizations Emerging corporate governance reforms in the post-SOX era, including provisions of the SOX Act, global regulations and best practices, ethical considerations, and corporate governance principles Practical examples and real-world "how did this happen" discussions that provide valuable insight for corporate directors and executives, auditors, managers, supervisory personnel and other professionals saddled with anti-fraud responsibilities Expert advice from the author of Corporate Governance and Ethics and coauthor of the forthcoming Wiley textbook, White Collar Crime, Fraud Examination and Financial Forensics Financial Statement Fraud, Second Edition c ontains recommendations from the SEC Advisory Committee to reduce the complexity of the financial reporting process and improving the quality of financial reports.

Rezaee, Zabihollah. Pedneault, Stephen.

Creative Accounting or Financial Statement Fraud?

Broihahn, Michael A. Practical examples, sample reports, best practices and recommendations to help you deter, detect, and prevent financial statement fraud Financial statement fraud FSF continues to be a major challenge for organizations worldwide. They have to seek incentives and opportunities that can attract fraudulent acts and rationalizing whether fraud is justified.

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  6. Since the fall of Enron, there have been serious changes in auditing standards with increased emphasis on the role of auditors as detection of fraud and not mere verification of financial accounts Boynton These assertions are founded on the ISA dealing with risk management and ISA addressing responsibilities of auditors Boynton There are generally three strategies that can be used in prevention of fraud.

    First is the dependence on the internal controls of the company to detect and prevent fraud Chowdhury This is a passive means of deterrence. The second and reactive method is to employ investigators after a fraud has taken place.

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    6. The third method is proactive and it utilizes the instruments and processes routinely used for detecting fraud James However a good plan to prevent fraud includes the three elements though many firms would typify themselves are one method of the three. In this new millennium, the parties interested in company financial statements are more informed than ever Chowdhury However, those who prepare these statements are even more sophisticated and can make crucial mistakes or intentional errors that would take time before detection.

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      Auditors are also important in prevention as they are with detection of fraud Romas Even though their primary role would be to detect by verification of the financial statements whether they depict true and correct financial situation of the company, their secondary responsibility is to prevent fraud from happening Chowdhury The primary responsibility of prevention is the duty of the agencies responsible for governance and management despite the fact that the financial reports represent management efficiency Romas Prevention of fraud is vested in individual responsible for governing an entity and managing the entity according to NSA 5 and ISA regulations Rezaee 67a.

      Under these provisions, the managers and those doing the governing job should emphasize fraud prevention tactics to alleviate chances of fraud and also apply fraud deterrence by convincing people not to commit fraud Boynton This can be accomplished by increasing possibility of detection and setting up severe punitive measures for culprits. Another approach to prevention of fraud is not to consider it as an accounting problem but as a social issue Rezaee 67a.

      When financial crimes are striped of the multitudinous differences, then a victim can be separated from money through three unlawful ways; by force, stealth or deception.

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      The first two are more wane but the third one is persistent Rezaee 67a. This is because there has been strict regulation and deterrence of the first two and people are becoming more educated, informed and crafty. Fraud is commonly identified as deception aimed at benefiting an individual of group of people and causing the victim to lose money.

      A dishonest individual under the US legal system can be regarded as a fraudster and fraud has certain features that identify it Rezaee b.

      Financial Statement Fraud: Prevention and Detection

      In order to prove fraud, the prosecutor have to prove that the alleged fraudster act included the following five elements; 1. There was a false financial statement of fact, 2. The perpetrator knew the statement to be false, 3. The perpetrator intentionally deceived the alleged victim, 4. The victim depended on the statement for information and, 5. The victims suffered a lost as a result of the trickery James Fraud is a criminal offense and because it entails a lot of premeditation and planning, its punishment is always severe.

      Federal and state statutes prescribe harsh punishment for individuals who are convicted of fraud Rezaee 69a. The sentencing guidelines have recommendation to the way fraud criminals should be charged and sentenced.

      Financial Statement Fraud: Prevention and Detection by Zabihollah Rezaee -

      The guidelines have upward reprimand from standard sentences particularly when the targeted victims were very vulnerable Rezaee b. The largely publicized fraudulent act is the corporate fraud which is controlled by the securities exchange act that was established in as well as other provisions that have been instituted by the Securities and Exchange Commission Rezaee b. These rules were set in reaction to serious corporate crimes in the s. These laws govern the sale of securities in stock, activities that range from manipulating stock prices to insider trade.

      The provisions also state the civil and criminal penalties that the perpetrators would face upon conviction. Despite these laws and the SEC, fraud has been endemic in the wake of 21 st century with WorldCom and Enron being the main culprits Rezaee 69a.

      Financial Statement Fraud-Detection, Prevention, Related Regulations Research Paper

      Besides other requirements, the Sarbanes-Oxley demanded that public companies should make frequent disclosure of their financial positions to alleviate possibilities of fraud Ribstein A public company oversight board was established to control accounting companies. These companies are required to register with this board so as to enhance the powers of monitoring by SEC and even to do investigations into scandals Ribstein This measure has enhanced compliance with the regulations of SEC because of the harsh penalties that were introduced. A company must create annual financial reports with proper internal controls of preventing and detecting fraud in the financial reports Ribstein Deficient antifraud programs are serious and imply weak internal control over the financial report.

      A good program to deter, prevent and detect fraud is that which will include fraud risk assessment tools, strategy to implement antifraud control activities, allow open communication and information flow and proper monitoring instruments. Lack of reporting should be faced with dire consequences.