Financial Statement Fraud
Financial statement fraud involves the manipulation of a company’s financial statements by management to deliberately misrepresent the true financial condition of the company. The fraud may be committed to inflate a company’s profitability or to decrease taxes by hiding revenue and increasing expenses.
The majority of financial statement frauds will involve one or more of the following schemes:
Concealed Liabilities and Expenses: Concealing liabilities and expenses allows the company to appear more profitable. The most common methods of concealment are omissions of liabilities and expenses, capitalized expenses, and failure to disclose warranty costs and liabilities.
Fictitious Revenues: The creation of fictitious sales of products or services is usually the result of pressure to boost revenues by owners, managers, lenders, stockholders, and others. This fraud usually involves the fabrication of fictitious customers, but also can involve fake invoices for current customers.
Improper Asset Valuations: The value of company assets is artificially increased to strengthen the company’s balance sheet and financial ratios. Four of the most common asset valuation frauds involve inventory valuation, accounts receivable, business combinations, and fixed assets.
Improper Disclosures: In addition to the numbers disclosed in financial statements, management must report all material information to prevent a user from being misled. Failing to disclose contingent liabilities, subsequent events, related party transactions, management fraud, and accounting changes is financial statement fraud.
Timing Differences: Accounting entries for revenue and/or expenses are improperly moved between one accounting period and the next period. This violation of accounting principles allows the fraudster to increase or decrease earnings as needed.
Call (619) 691-6379 today to talk with Chuck Cochran, the owner of C.R. Cochran & Associates, about your specific investigative needs and how we can help you.