Fraudulent Financial Reporting
Posted on Wednesday, April 05, 2017
Internal frauds can be divided into two separate categories – fraudulent financial reporting and asset misappropriation.
Fraudulent financial reporting is the intentional misstatement or omission of amounts or disclosures from financial reports to deceive financial statement users. This can be accomplished by
- Manipulating accounting records used to prepare the financial statements
- Misrepresenting transactions or information from the financial statements
- Intentional misapplication of accounting principles in the financial statements
One way fraudulent financial reporting can occur is through the incorrect recognition of revenue. Depending on the circumstances, an organization may want to either overstate or understate revenue. Such circumstances may include meeting budgeted amounts, the pressure to generate positive operating results to make the organization look better, or to show less revenue to make the organization look as though it needs more assistance than actual. Often times, the manipulation of revenue is accomplished by failing to report receivables in the proper period or holding records open beyond the period end date to inflate revenues.
Fraudulent financial reporting can also occur through the incorrect recognition of expenses. Similar to revenue, expenses may be either overstated or understated depending on the circumstances. In addition, fraud may occur by misclassifying expenses of funds used for programs or improper allocation of expense by function (program, management and general, and fund raising).
Since management has more authority and access than employees, they also have the ability to commit fraud by overriding controls that otherwise may appear to be operating effectively. Journal entries are the most common and easiest ways to misstate financial statements. Management may record journal entries to adjust balances in the financial statements to what they want the balances to be as opposed to what the actual balances should be. Another way for management to intentionally misstate financial statements is through incorrect accounting estimates. Allowances for uncollectible receivables, estimated lives of fixed assets and depreciation, and estimates of accrued vacation are some of the estimates included in financial statements that can be misstated.
Circumstances that may indicate that fraudulent financial reporting is occurring include the following:
- Significant or unusual adjustments at year end
- Documentation relating to cash receipts or disbursements is missing or altered
- Cash flows from operating activities is inconsistent with actual cash flow
- Unusual or unexplained fluctuations from year to year or from budget to actual
- Significant related party transactions or failing to report related party transactions
- Transactions that have been pre or post dated from the actual transaction date
Continue to follow DWD’s Mission Minded blog as we discuss misappropriation of assets in the next blog post.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.