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1. Introduction
Financial statement fraud continues to be a significant problem for businesses of all sizes. It used to be that the biggest problems with fraudulent statements were found in smaller companies but that before Enron, Worldcom, Tyco, Adelphia, Xerox and Parmalat.
The generally accepted definition of financial statement fraud is:
The deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements in order to deceive financial statement users.
Financial statement fraud is similar to all occupational frauds in some ways. Perpetrators have motivation and opportunity and are able to rationalize their actions. So, the analysis of financial statement frauds falls into the three points of the fraud triangle developed by Cressey (1973). Motivation, opportunity and rationalization in financial statement fraud show up as:
situational pressures that motivate management to commit fraud;
perceived opportunity to commit and conceal the dishonest act; and
some way to rationalize the act as justifiable.
But, although most economic fraud is undertaken solely to enrich the perpetrator, financial statement fraud is often committed out of other desires than purely for self-enrichment. Owners or managers of companies falsify accounting entries to further the interest of the company itself.
Management may be motivated to commit financial statement fraud to maintain their own status, obtain higher stock prices, demonstrate compliance with financing covenants, meet company projections and investor expectations and obtain financing or more favorable terms on existing financing.
Financial statement fraud is estimated to occupy 9 per cent of all occupational frauds, in ACFE Report to the Nations (2014), with a median loss of $1m. Because the maintenance of financial records involves a double-entry system, fraudulent accounting entries usually affect two accounts and, therefore, at least two categories on the financial statement.
Financial statement fraud schemes fit into five broad classifications:
fictitious revenues;
timing differences;
concealed liabilities and expenses;
improper disclosures; and
improper asset valuation.
The main challenge faced by financial statement researchers is that they are not always able to observe or measure the earnings management. The Beneish model, or Beneish M-score, is a useful tool to detect financial statement fraud and earnings manipulation.
The next section of the paper provides a previous research discussion, and Section...