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Fraudulent financial reporting

21 Jul 2010

Tenk Loubser

A study conducted in the USA provided a comprehensive analysis of fraudulent financial reporting. Some of the key findings may also apply to businesses in South Africa. These include:

  • Medium-size companies engaged more regularly in financial statement fraud than big companies.
  • In most fraud cases, the CEO and/or the CFO were involved.
  • The most common fraud techniques were improper revenue recognition, followed by the overstatement of existing assets or capitalisation of expenses.
  • Relatively few differences were found in the characteristics of the Board of Directors of firms engaging in fraud compared to similar firms not engaging in fraud. While audit committees have been put in the spotlight in recent times, one of the study's important insights is that no meaningful differences exist in the audit committee characteristics of firms committing fraud and others.
  • A substantial number of the firms conducting fraudulent financial reporting changed auditors in the period between the previously clean financial statements and the previously fraudulent financial statements.
  • The long-term negative consequences of fraud were apparent. Companies engaging in fraud often experienced bankruptcy at a much higher rate than no-fraud firms.
  • In many cases fraud went undetected by auditors, despite the size of the audit firm. Virtually all the firms involved in fraud received unqualified opinions on their previous set of fraudulently misstated financial statements.

Although further research is required to better understand the underlying factors likely to effect the prevention and detection of fraudulent financial reporting, the Board of Directors of all companies should pay attention to these alarming results.

For more information contact Tenk Loubser on tel. 021 808 7220 or e-mail tenk@exceed.co.za.

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