Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance, 2nd Edition

CHAPTER 6

Financial Statement Fraud

EXECUTIVE SUMMARY

Financial statement fraud can be fatal to a company. One way to prevent it is to understand what motivates executives to do it. Barry Minkow, who was convicted of fraud as CEO of ZZZZ Best, said that he began to feel that his worth as a person was tied to the performance of his stock. Joseph Wells, founder of the Association of Certified Fraud Examiners, has said that the only thing that will deter fraudsters is the real perception that they will be caught if they commit the crime. Personal accountability along with strong gatekeeper oversight and government enforcement will lessen corporate fraud. Numerous red flags and elements of financial statement fraud need to be understood to lessen the possibility of its occurrence. It is always important to remember the corruption equation in preventing fraud: Power without sufficient accountability leads to corruption.

RECURRING THEMES IN FINANCIAL STATEMENT FRAUD

Financial statement fraud cases contain the following recurring themes:

• Pressure on senior management to meet financial goals
• Autocratic senior management
• Aggressive accounting practices
• Weak internal controls
• No whistleblowers

Sarbanes-Oxley was enacted as a result of a flood of financial statement scandals, but any fraud prevention program in a company has to include efforts to prevent all types of fraud. This chapter addresses financial statement fraud, with the succeeding chapters addressing asset misappropriations, ...