APPENDIX SIX C
Fraud Risk Factors: AU Section 316
RISK FACTORS RELATING TO MISSTATEMENTS ARISING FROM FRAUDULENT FINANCIAL REPORTING
Examples of risk factors relating to misstatements arising from fraudulent financial reporting are presented next.
Incentives/Pressures to Commit Fraudulent Financial Reporting Risk Factors
- Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or indicated by):
- High degree of competition or market saturation accompanied by declining margins.
- High vulnerability to rapid changes such as changes in technology, product obsolescence, or interest rates.
- Significant declines in customer demand and increasing business failures in either the industry or the overall economy.
- Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
- Recurring negative cash flows from operations or an inability to generate cash flows from operation while reporting earnings and earnings growth.
- Rapid growth or unusual profitability especially compared to that of other companies in the same industry.
- New accounting, statutory or regulatory requirements.
- Excessive pressure exists for management to meet requirements or expectations of third parties due to:
- Profitability or trend-level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic) including expectations ...
