The Story of . . . Deceit?

Financial Statements Can Be a Work of Fiction

Financial statements are supposed to tell the story of a business. But sometimes that story is a lie. Although financial statement fraud is the least common type of occupational fraud committed, it results in the highest average loss, averaging $2 million per incident.

Who It Hurts

Those who rely on financials to provide accurate, relevant and timely information – investors, bankers and analysts – are not the only ones harmed by this type of fraud. Damage can extend to the employees, directors, customers, vendors, and professional service firms associated with the company that has falsified its financials.

Why They Do It

At the heart of this fraud is the desire to mislead, either to hide debts or expenses, to exaggerate revenues or assets, or to hide other illegal activity. The perpetrators – most usually management and/or members of the accounting department – are attempting to write a work of financial fiction. Their motivation is often to preserve their job or the jobs of others rather than to directly enrich themselves. On a psychological level, the motivation can be the desire to hide poor decision-making or to maintain or gain status.

Today's Fiction; Tomorrow's Headline

In this era of high unemployment, low or no revenue growth and decreased availability of capital it is not hard to imagine that there are many works of financial fiction that are labeled as financial statements. Regardless of whether they make the headlines,  most of these stories will not have happy endings and the damage they do will ripple through our economy. Behind these stories are authors that are trying to hide something to keep the game going.

How about you? Have you been misled by fictitious financials? In the next post we’ll look at how we can protect ourselves from being fooled.

Comments

[accounting services]

Tax Evation are always the reason for fraud in the accounting books. A lot of them are not caught at all.

[Wail]

While I agree that a CFO does not necessarily need to be a CPA, don't diucnsot the subject area(s) in which a CPA is an expert; i.e. Accounting/Finance. The primary responsibility of a CFO is to make decisions based on financial risk to an organization and the effect on the financial statements. Either being a CPA or having one close at hand (internally/externally) is critical to a CFO.

[Rendy]

Cindy,I'm going to have to agree with Samuel on the CPA designation. I am the Treasurer and tax drcietor at a privately held oil and gas exploration and production company and we have several CPA's on staff, including me and a CAO. Our CFO has an MBA from Harvard, but no accounting background (although he knows accounting pretty well). He is, however, very well acquainted with the investment banking community and is able to handle all the important aspects of a CFO. Because our CAO is very capable of running the accounting function and has staff well versed in financial reporting, and because this CFO has a background in geology and physics, he is a good financial leader and the ideal person for the CFO role.