Financial statement fraud is intentional misstatements or misrepresentations within the financial statements. A forensic accountant’s role in investing financial fraud is to look for warning signs or red flags.

Some common accounting red flags include:

• Aggressive revenue recognition -  such as recognising revenue in earlier periods than when the sale was delivered
• Growth in inventory that doesn’t match sales
• Gross margin or operating margins out of line with companies in the same industry
• Growth in revenues that is far greater than growth in other companies in the same industry
• Reported earnings that are positive and growing, but operating cash flow that is declining
• Unusually high revenues and low expenses at period end that cannot be attributed to seasonality

Financial statement Fraud classification

 

Motivations for financial statement fraud

• Compensation packages based on reported earnings
• Desire to maintain or increase share prices
• Need to meet internal and external forecasts
• Desire to minimise tax liabilities
• Need to avoid violations of debt covenants
• Need to meet unrealistic commitments made
• Desire to raise external capital cheaply

What questions do you have?

We are happy to help. Please post your comment below or call Lisa Byrne, Audit Manager at Cooney Carey, on 01 677 9000. Alternatively, send her an email: lbyrne@cooneycarey.ie 

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