The Financial Statement Fraud Risk

Abstract

The financial statement fraud (FSF) is known as accounting fraud, management fraud, or fraudulent financial reporting (FFR). It takes place when the financial statements (reporting) contains an intentional misrepresentation or omission of material facts (amount, disclosure, or evidence) to deceive the users (Association of Certified Fraud Examiners [ACFE], 2016; Goel & Gangolly, 2012). The financial statements (FS) are necessary to evaluate a company’s performance, financial health, and management stewardship (Eierle & Schultze, 2013). It provides users with useful financial information to make efficient resources allocation and make informed economic decisions (Konigsgruber, 2012). Evidence shows that accounting frauds are still going on by companies, and these frauds misrepresent their financial statements (Bui & Amaria, 2014; Young & Peng, 2013). The perpetration of accounting fraud is still prevalent and costly to the business world (Hays, 2014). The FSF has a significant monetary impact on companies compared to the other categories of frauds (Roxas, 2011). It adversely affects a broad range of stakeholders including companies’ shareholders, creditors, auditors, and others (Parker, 2012). The fraud cost is eventually affecting all members of society in the form of higher prices for provided services or goods (Alleyne & Amaria, 2013). A company’s stock price declines when accounting frauds are revealed, and thereby stockholders suffer the losses and consequences of reputation risks and difficulties in raising corporate capital (Wuerges & Borba, 2014). The FSF continues to grow (Kravitz, 2012). The United States (US) corporate financial fraud cases increased by 37% from 526 cases in 2005 to 725 cases in 2011 (Federal Bureau of Investigation [FBI], 2012). Cases of high-profile management frauds (such Enron, and others) have enormously influenced the global economy and the stock markets (Abbasi, Albrecht, Vance, & Hansen, 2012). These instances of FFR question the roles of auditors, regulators, and others; and raise concerns about the credibility of the financial reporting process (Peytcheva & Warren; 2013; Stancic, Dimitrijevic, & Stancic, 2013).