Financial Statement Fraud and Revenue Recognition Fraud - Essay Example

Financial Statement Fraud and Revenue Recognition Fraud Introduction In the modern global market, the generally accepted accounting standards govern the code of preparing, presenting, and interpreting financial and accounting statements. Nevertheless, many corporates and business leaders have been neglecting these standards thus propagating financial frauds (Pinkasovitch 1). Ideally, the increased use of technology plays a significant role in fostering fraudulent activities in the global market where criminals can now commit wide range and complex financial crimes. We can define financial fraud as an intentional act to deceive people through manipulated financial statements for personal gain (“Bank Negara Malaysia” 1). Financial fraud is crime under civil law and involves complex financial transactions conducted by white-collar business professionals with a criminal intention (“Bank Negara Malaysia” 1). Nevertheless, financial fraud derives numerous loses on the global economy and on the reference corporations where many companies collapse due to financial frauds. Additionally, financial fraud demeans investor confidence in financial reporting and lowers the efficiency of corporate governance. A financial statement fraud refers to an intentional misrepresentation of financial information that the corporation presents to the public. Notably, improper revenue recognition, failure to record incurred liabilities, and failure to disclose contingent liabilities are the most dominant financial statement frauds (Bradford 1). Cases of financial statement fraud are on the increase and the economic crisis catalyzes the problems. Nevertheless, most of the financial statement frauds relate to revenues recognition while accounting errors take the other proportion. As such, internal and external auditors should understand the dynamics of revenue recognition fraud and institute proper measures to curb financial fraud. Ideally, financial statement fraud and revenue recognition fraud relate to financial fraud. Definition Financial statement fraud refers to an intentional misrepresentation, misstatement, or omission of financial statement data for the purpose of deceiving the public and creating a false impression of an organization's financial strength (Colby 1). Notably, financial statement fraud is an enormous challenge in the global market as corporations seek to stalk investors to continue investing in the corporation. Moreover, corporations engage in financial statement fraud for purposes of securing bank approvals for financing and satisfy the shareholder’s interests (Bradford 1). Ideally, the top management plays the major role in a financial statement fraud since they supervise and authorize the preparation of financial statements. There are different forms of financial statement fraud in the global market where the initiators will use distinct systems of manipulation to maintain the appearance of the financial statement fraud. The most common types of financial statement fraud include manipulation of liabilities, improper recognition of revenues and expenses, improper asset valuation, improper disclosures (Pinkasovitch 1) on financial statements, and fictitious sales (Colby 2). However, manipulation of revenue is the most dominant form of financial statement fraud. This includes the posting of sales prior to payment while the manipulation of expenses includes the capitalization of normal operating expenses (Bradford 1). On the other hand, the manipulation of liabilities relates to failure to record regular expenses while improper disclosures relates to misrepresentation of the company’s financial status (Bradford 1). An overstatement of current assets on financial statements leads to improper assets and defines financial statement fraud (Colby 2). Assuredly, financial statement fraud demeans capital markets confidence, makes capital markets inefficient, discredits the integrity of the auditing profession, and lowers the effectiveness, reliability, and transparency of financial reporting (Nguyen 1). It also lowers the morale of the employees who commit themselves to the success of the organization. On the other hand, revenue recognition is one of the main accounting principles in the US Generally Accepted Accounting Principles (GAAP), which defines the treatment of revenue in a corporation (“Tenrox” 1). Ideally, there are different ways of recognizing revenues within GAAP and distinct methods present revenues in different ways. Indeed, we can recognize revenues on a sales basis, percentage of completion, cost recoverability, and installment (“Tenrox” 1). Nevertheless, corporations and business professions have been recognizing revenues in fraudulent ways thus leading to revenue recognition fraud. They achieve this by keeping the books open past the end of the accounting period, recording consignment goods as sales, improper bill-and-hold transactions, failure to record offsetting accruals, and any other method that can boost earnings. However, holding the books of accounts open past the end of the accounting period is the most common form of revenue recognition fraud. Ideally, the intentional recording of revenue in the wrong accounting period or deferring recording of earned revenue for a future unfavorable reporting period amounts to revenue recognition fraud (Colby 2). Furthermore, recording goods on consignment as sales would also lead to revenue recognition fraud. Ideally, consignment good should not assume the status of sales since they are still assets of the consigning company. Additionally, corporations can manipulate invoices for phantom customers in relation to items that they never ordered. The re-invoicing, pre-billing, and duplicating billings leads to excess revenue estimates for a reporting period (Bradford 1). Reasons to Cook the Book Ideally, there are diverse reasons that motivate financial statement fraud and revenue recognition fraud. One of the dominant reasons is to draw and maintain the interest of investors as investors envy corporations with massive financial strength. Fraud can derive a manipulated financial strength. The top management engages in financial fraud for purposes of luring the financial institutions approve their financing (Colby 2) and meet the shareholder’s interests as well maximizing the shareholder’s value. They also seek to conceal the financial crisis in the corporation for purposes of restoring the confidence of customers, shareholders, and business partners (Bradford 1). Furthermore, financial fraud serves the purpose of meeting the financial analysts’ estimates through misrepresentation, overstatements, improper disclosures, and improper recognition of revenues and liabilities, and other dubious financial transactions. Although financial fraud is a crime under civil law, it also covers other illegal activities that happened in a given accounting period. The top management can also engage in financial fraud if the management capital influence the terms of profit sharing in an organization. Modern technology creates more opportunities to participate in financial fraud where the chances of detection are equally low thus fostering financial fraud. Ultimately, business professionals may "cook the books" for purposes of buying time to fix the financial problems that prevent the organization from satisfying the GAAP or complying with terms of a financing capital (“Association of Certified Fraud Examiners” 1). Works Cited “Association of Certified Fraud Examiners.” FRAUDBASICS. 2013. Web. 4 December 2013. < http://www.fraud-magazine.com/article.aspx?id=4294967876> “Bank Negara Malaysia.” What is Financial Fraud?2010. Web. 4 December 2013. “Tenrox.” Revenue Recognition. 2013. Web. 4 December 2013. < http://glossary.tenrox.com/Revenue-Recognition.htm> Bradford, Chris. What Is Financial Statement Fraud? Web. 4 December 2013. < http://smallbusiness.chron.com/financial-statement-fraud-57182.html> Colby, Everett. Financial statement fraud, Part 1. Web. 4 December 2013. < https://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/FinStatFraud/FinStatFraud_p1.pdf> Nguyen, Khánh. Financial Statement Fraud: Motives, Methods, Cases, and Detection. Florida: Universal-Publishers, 2010. Print. Pinkasovitch, Arthur. Detecting Financial Statement Fraud. September 28, 2011. Web. 4 December 2013. < http://www.investopedia.com/articles/financial-theory/11/detecting-financial-fraud.asp> Read More