Manipulation of accounts means falsifying figures in books of accounts

with the object of reporting net income more or less than what actually it
is, or for making balance sheet figures to appear more or less attractive
than what actually they are. Directors may be interested in reporting a
higher net profit in order to win shareholders' confidence or to earn more
commission if they are entitled to a commission on profits or to fetch better
price for the shares they hold. In order to show inflated profits such
methods are employed as inflating sales, suppressing purchases, writing
off inadequate depreciation, providing inadequate provision for bad debts,
etc. On the other hand, management may be interested in showing a net
profit less than the company actually earned. The intention for doing this
may be to deceive tax authorities or to buy shares of the company at a
low price. In order to show lower profits management may employ such
methods as suppressing sales, inflating purchases, making excessive
provisions for depreciation and bad debts, etc. Manipulation of accounts
is done by director and top management; therefore, for the auditor it is
very difficult to detect it.

Financial statement fraud is increasingly becoming a problem in

corporate America today. Read on to know more about financial
statement fraud, how is it accomplished, the big accounting frauds in
history and the Sarbanes-Oxley Act of 2002.

Financial Statements and Their Users

Consider yourself in the person of a potential investor. You have excess

funds and you want to put your money in a profitable firm by buying
shares of the company. In the future, you hope to get returns in the form
of dividends and increase in the market value of your purchased stock.
You have several potential companies in your mind and to evaluate your
options, you look into their financial statements. By looking and
analyzing their financial statements, you will be able to properly assess
their profitability, cash flows and other performance indicators. This will
help you predict their ability to pay future dividends as well the likelihood
of an increase or decrease in stock value. However, you can only do this
if the reliability of financial statements is assured. You need confidence
that those financial statements you rely upon accurately present the
financial position, performance and cash flows of these companies.

Reliability of financial statements is threatened by financial statement

fraud.
What is FS Fraud?

Financial statement fraud is the deliberate alteration of the company's

financial statements in order to mislead the users of financial information
and create a rosy picture of the company's financial position,
performance, and cash flows. Typically, financial statement fraud is
propagated by management to achieve desired objectives. For instance,
management of a company that is obtaining bank approval for a loan
may misstate their financial statements to create an impression that they
can very well pay for such loan. Management of a firm may misstate
financial statements to make their stock attractive to investors and
consequently, increase their stock price. Further, management may
misstate financial statements to justify their bonuses and increased
salaries. This usually happens when management compensation is tied
to company performance.

Big Accounting Frauds in History

1. Enron. Enron deliberately misstated profits, cash flows and

understated liabilities with the use of creative, yet questionable
accounting methods. A disguised loan in 1999 in which the proceeds
from the sale of bonds was reported as cash from operations. This
overstated operating cash flow by $700 million. With the use of market to
market accounting, Enron recognized a very significant amount of future
earnings as current income. This allowed a certain business unit to
report quarterly profit of $40 million when in fact, this unit was actually
operating at a loss. Another loan transaction was understated by $4.85
billion.

2. WorldCom. In this case, $3.8 billion of expenses were hidden.

Revenue expenditures, specifically interconnection expenses, which
should have been expensed were reported as asset. This led to the
overstatement of its 2001 net profit.

3. Parmalat. A €3.95 billion cash fund in the Bank of America reported in

the company balance sheet was discovered to be actually non-existent
in 2003. This discovery then led management to announce that such
amount was missing.

4. Tyco. Income was overstated by $500 billion. Top company

executives stole $150 million through unauthorized forms of executive
compensation.

How is it Accomplished?
Financial statement fraud is generally accomplished by the following:

1. Improper revenue recognition. This may include schemes such as

double billing of sales, recognizing fictitious revenues, recording
shipments to company-owned facilities as sales, pre-recognition of
future sales, etc.

2. Manipulation of expenses. Expenses are capitalized or charged to

asset accounts. This can also be done by depreciating and amortizing
costs too slowly. Such practices overstate income and overstate assets.

3. Non-recognition of liabilities. This may include schemes such as

improper off-the-books treatment of certain liabilities, insufficient
disclosures of contingencies and commitments, disguising loan
transactions as other transactions, etc.

4. Improper cash flow presentation. This is done by overstating cash

inflows of the business, reporting fictitious cash flows, presenting the
proceeds of loan transactions as part of cash flow from operations, etc.

Financial statement fraud usually involves overstating assets, revenues

and profits and understating liabilities, expenses and losses. However,
the overall objective of the manipulation may sometimes require the
opposite action.

Financial statement fraud is the deliberate misrepresentation of the

financial condition of an enterprise accomplished through the intentional
misstatement or omission of amounts or disclosures in the financial
statements to deceive financial statement users.

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.
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. 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 had the real financial results been published
promptly.

Financial statement fraud usually involves overstating assets, revenues,

and profits and understating liabilities, expenses, and losses. However,
the overall objective of the manipulation may sometimes require the
opposite action, e.g., concealing higher-than-expected revenues or
profits in a good year to help the subsequent year that is expected to be
tougher.

A series of big-name frauds in the past decade has been accompanied

by lawsuits against auditors because of their suspected negligence in
not detecting the financial statement fraud. As a result, auditors have
risked the loss of money and what is even more influential, the loss of
their reputations. This situation has pushed auditors and the related
organizations and institutions to improve the audit processes in order to
be more effective in identifying risk and collecting evidence for issuing
audit opinions on financial statements. According to a study published in
1999 by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), the use of fictitious revenues is the most popular
method of committing financial statement fraud. As reported by the
Securities and Exchange Commission
(SEC) Commissioner, Isaac C. Hunt, Jr., in his speech “Current SE
C Financial Fraud
Developments,” “Over half of financial report cases are directly related to
revenue recognitions”
(Hunt, 2000). Accounts receivable are attractive fraud targets, primarily
because of the way receivables are viewed by lenders. Unlike inventory
or fixed assets, accounts receivable
–
in the eyes of financiers
–
are the next best thing to cash. Because the mechanics are simple,
sales/receivables fraud schemes lead the fraudulent financial statement
pack (Wells, March 2001). In this study, the main problem is to
investigate the problems and some recommended solutions to financial
statement fraud in an organization.
1.3 Objectives of the Study
The study sought to assess the problems of financial statement fraud in
an organization. Specifically, the study sought to: 1.
examine the relationship between financial statement fraud and
organization performance.

2.

examine the consequences of financial statement fraud in an

organization. 3.

examine the
reasons for fraud, types and implication of costs of fraud in an
organization.
4.

suggest possible solutions for detecting and preventing financial

statement fraud in an organization.
1.4 Research Questions
1.

What is the relationship between financial statement fraud and

organization performance? 2.

What are the consequences of financial statement fraud in an

organization? 3.

What are the

reasons for fraud, types and implication of costs of fraud in an
organization?
4. What are the possible solutions for detecting and preventing
financial statement fraud in an organization?
1.5 Research Hypotheses Ho
1: There is no relationship between financial statement fraud and
organization performance.
Ho
2: There are no consequences of financial statement fraud in an
organization.
1.6 Significance of the Study
This study will be of immense benefit to other researchers who intend to
know more on this study and can also be used by non-researchers to
build more on their research work. This study contributes to knowledge
and could serve as a guide for other study.
1.7 Scope/Limitations of the Study
This study is on problems of financial statement fraud in an organization
with a view of finding possible solution to it.
Limitations of study