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Protecting against fraudulent financial reporting

Guest post by: Guy Rigby

Article Overview: The National Fraud Authority recently reported a significant increase in the volume and value of frauds, and this is likely to continue to rise. False accounting or fraudulent financial reporting is likely to be by far the largest corporate fraud risk as we go into 2010. Management in many businesses is under huge pressure to demonstrate growth and absorb any previous over-reporting.

Protecting against fraudulent financial reporting



Increasing risk of fraud Aggressive accounting polices, declining demand or earnings, complex corporate structures, undue secrecy and remote locations all increase such risks. Put together they can produce a lethal cocktail of factors which significantly increase the risk of financial statement fraud.

In putting together their year-end accounts, many companies will have revealed just how tough it was in 2009. As monthly management accounts are aggregated or subsidiaries report to their parents, there may be a nasty surprise in store for some. Results may show performance far below what has been reported in monthly management packs and some difficult questions will have to be asked. For a few there will be the temptation to plug any holes in the accounts with false accounting entries and fictitious supporting documentation.

The risk of fraud is compounded by the ability of senior management to override controls through collusion or simply brow-beating staff into manipulating the books. Senior management and non-execs need to be aware of the fraud risks associated with financial statement fraud, including why financial statement fraud might be committed and what motivates the fraudsters to commit it.

Responding to fraud However given the increased pressures brought about by the recession understanding the risks is no longer enough. A Federation of Small Businesses survey last year revealed that a third of businesses have been affected by fraud. How you respond to a fraud can mean the difference between the company surviving or going under.

In a recent case, a subsidiary of an office supplies firm over-reported trading results throughout the year to trigger a buyout bonus for the local directors. This was concealed from head office by creating false sales invoices which were reversed after the year-end. This fraud was only spotted in the second year when the fraudsters tried, but failed, to conceal the accumulating black hole as an inter-group debtor, producing false documentation from another subsidiary to support this claim. As it was, substantial bonuses were paid to the subsidiary directors in the first year and significant investment decisions were based on fraudulent accounting information, which resulted in further consequential losses to the business.

A response plan is a vital precaution. From receiving a report through to evaluating the suspicion, investigation and recovery, all elements should be detailed and responsibilities assigned. The chances of recovery diminish with every day after a fraud has been detected. It is therefore imperative that those dealing with financial statement fraud understand the protocol for investigating, who to involve and, just as importantly, who not to involve.

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Article Tags: fraud, fraudulent financial reporting, protection, risk



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