Characteristics of companies with a higher risk of financial statement fraud: A survey of the literature

Abstract

Fraud and corruption in companies is a serious problem in this day and age. One only needs to think of Enron, Parmalat and Macmed. Companies are constantly identifying new and ingenious ways to defraud their customers, investors, the government and others.For this reason it is important for stakeholders with an interest in a company to devise ways of detecting and identifying fraud to protect their interests. Managers are primarily responsible for the prevention and detection of financial statement fraud. However, they may be the primary perpetrators of fraud. The responsibility to detect and identify financial statement fraud should also not rest solely with the auditors, as they cannot be expected to provide absolute assurance that all material misstatements are detected and identified.This research set out to find whether there are any characteristics in a company by means of which possible financial statement fraud can be detected and identified. Numerous authors gave their insight on the topic in the past, but few came to a clear-cut conclusion of fraud indicators.The article commences with an explanation of financial statement fraud. It further analyses various authors’ statements on the characteristics displayed by companies with a higher propensity for financial statement fraud. The study confirmed that there are characteristics which can identify the risk of financial statement fraud in companies. Parties with an interest in a company, notwithstanding managers and auditors, can observe and measure these characteristics to detect and identify such fraud.