Financial Statements Of Financial Statement Fraud

The most common accounting fraud is the misrepresentation of financial statements which is frequently known as “cooking the books” and includes manipulation, falsification, or alteration of accounting records, intentional omission from the financial statements and intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.

Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay

1. Fraudulent financial reporting – reporting false financial performance and overstating the company’s earnings and falsifying the level of liabilities to attract investor’s contributions.

In fraud committed against organizations, the victim of fraud is the employee’s organization. In frauds committed on behalf of an organization, executives usually are involved in some type of financial statement fraud; typically, to make the company’s reported financial results appear better than they actually are. In this second case, the victims are investors in the company’s stock. A third way to classify frauds is via the use of the ACFE’s occupational fraud definition, “the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2010). The ACFE includes three major categories of occupational fraud: asset misappropriations involves the theft or misuse of the organization’s assets, corruption involves the wrongful use of influence in a business transaction in order to procure benefits contrary to their duty to their employer, and fraudulent financial statements involving falsification of an organization’s financial statements for personal gain.

Companies create complex accounting schemes to boost revenues to make investors think that the stock price of that actual company holds the price that the company is falsely promoting, to create a false expectation for investors to keep investing large amounts of money in their stocks and generate profit from that false practice. An example of fraudulent practices against company and client investors was the case of Bernard Madoff from Bernard L. Madoff Investment Securities LLC. which committed decades of long fraud. (Stempel, 2015). Bernard Madoff plead guilty in 2009 and was sentenced one hundred fifty years of incarceration.

The manipulation of accounts fraud scheme is generally fulfilled by employees in top management positions and it usually involves making understatements or overstatements on financial statements making it very hard to detect. The process followed as Troy Adkins, (2015) explains is very simple. The financial statements are either overstated to show different figures in the earnings on the income statements making them look better than they actually are or the earnings in the current periods are manipulated in such a way that the revenue is understated or they inflate the current year’s expenses. The second process includes making the financial statements look worse than they are in reality. Deloitte, (2009) explains a number of ways which the accounts are manipulated where as one of the ways is to manipulate the reported earnings directly. They further explained that overstating the

Many organizations have been in the news over the past few years due to accounting ethical breaches that have affected their customers, employees, and the general public. I searched the Internet to locate a story in the news that depicts an accounting ethical breach. I selected Krispy Kreme. I enjoy their hot donuts and was curious to learn more about how they played with the numbers. For some reason I always want to dig into the trickery behind the manipulation of financial statements.

Some industry-specific factors, such as having valuable near-cash assets, can increase the organization's vulnerability. Also they will need to rationalize the actions as justifiable. The individuals committing the fraud must first convince themselves that their behavior is acceptable or will be temporary. For example, Barry Minkow’s believed that the lies and deceit are for the betterment of his company and that with time everything will eventually return to normal.

Dissertation Overview............................................................................................... 1 1.1. 1.2. 2.1. 2.2. 2.3. 2.3.1 2.3.2 2.3.2.1 2.3.2.2 2.3.2.3 2.4. 2.4.1 2.4.2 2.4.2.1 2.4.2.2 2.4.2.3 2.4.2.4 2.4.3 2.4.3.1 2.4.3.2 2.4.3.3 2.5. 2.5.1 2.5.1.1 Research Framework.......................................................................................... 1 Overview of the Three Essays ............................................................................ 3 Introduction ........................................................................................................ 5 Related Research ................................................................................................ 7 Information Market Based Fusion...................................................................... 8 Information Markets .................................................................................... 8 Information Market Based Fusion ............................................................... 9 Determining Final Odds.......................................................................... 10 Classifying Objects................................................................................. 14 Distributing Payout ................................................................................. 14 Base-Classifiers and Data

Unfortunately, I do believe that aggressive accounting and financial statement fraud are a common practice. I don’t think it’s to far fetch to believe that companies use projections and other types of false data to fool banks especially when they have huge incentives to do so.

The center of attention of this report is on creating an awareness of how financial statement fraud is done, why it is done, and ways that you can help to detect and prevent it from occurring. The report also includes examples of 2 companies. Fraudulent financial reporting is one of the major factors which affect the business world. There are 3 types of occupational fraud among which financial statement fraud is the most costly. The 3 types of frauds are asset misappropriations, corruption, and fraudulent financial reports and this report will be focusing on fraudulent financial reporting. According to a research done by ACFE (Association of Certified Fraud Examiners) in 2006 shows that ten percent of occupation fraud is done by statement fraud. Financial statement fraud is not very common but evidence shows that it is the most expensive kind of fraud; The median loss for asset misappropriation was USD150,000 while the median loss for financial statement fraud was USD2 million which was 13 times greater. The 2006 survey helped to find out the most common kind of manipulations of fraudulent financial reporting which was:

Financial reports of companies shows lots of important information to shareholders and stakeholders like how is the situation of company, does it profitable or not? Shareholders and stakeholders can identify their management or investing strategies if they hundred percent sure these financial statements demonstrates truth. Accounting irregularities has massive cost to company and financial markets. For example Dell -the PC maker- between 2002 and 2006 has remembered fraudulent earning issue up to 150 million dollars. (http://www.crn.com/news/channel-programs/201800702/dell-accounting-scandal-not-a-happy-story-cfo.htm) Outcomes of this type of shame scandals face up of its costs and loose in investor wealth.

Financial Statement is the heart and soul of the business industry as it provides the financial condition of the company and the going forward initiatives of the corporation, therefore it is critical that the financial statement is free from manipulation and misstatement to be material and useful for stakeholders and other earning statement users. Goel and Gangolly (2012) implied that top management knows the financial statement users will perceive the audited report as credible, and strategically writes under thorough guidance of corporate lawyers to cautiously position the company’s image positively (p.75). Goel and Gangolly argued that not only the financials metrics, but disclosure statements contain “linguistic cues” for investigation of accurateness and honesty of the writing and presentation style (p.75-76). Financial statement fraud has become a growing problem in the accounting profession and the business industry. According to Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2010) 1998 to 2007 fraudulent financial reporting statistics, over 60% of the fraud cases were revenue fraud (p.5). Abbasi, Albrecht, Vance and Hansen (2012) emphasized the harmful effect of financial fraud to our economy, specifically to risk-averse investors, which could have crucial long-term consequences to company’s sustainability (p.1293). Abbasi, Albrecht, Vance and Hansen indicated that most companies that were

[ABSTRACT] from the analysis of accounting Information distortion that is illegal, because the accounting fraud, manifestations and hazards start to analyze the accounting fraud of China's listed companies the motivation to find out the real causes of the accounting fraud, and through drawing and learn from foreign countries in the prevention and treatment of accounting fraud experience, to present my accounting fraud prevention and treatment response.

Over the past two years, corporate America has endured a plethora of fraudulent acts committed by those of high status within their respective corporations, most of which involve internal fraud. Internal fraud has two main aspects, misappropriation of assets and fraudulent financial reporting, with the focus of this discussion lying within the former. Misappropriation of assets is defined as fraud for personal gain. It is the most common type of fraud found among employees and frequently includes theft of cash and inventory.