Financial statement fraud is the intentional misstatement or omission of material facts in financial statements with the aim of deceiving users for financial gain. It has become a major concern for auditors, investors and business executives who rely on these statements to make important decisions (Alleyne & Brown, 2020). Financial statement fraud schemes have become increasingly sophisticated and difficult to detect. This essay will examine how these schemes are carried out in order to inform detection and prevention methods.
Firstly, financial statement fraud generally involves the misrepresentation or falsification of data that can be found within three main categories: revenues, expenses and assets (Alderman & Rezaee, 2016). A common type of revenue fraud is known as channel stuffing – which occurs when a company attempts to inflate its income by selling excess inventory to customers who may not even want it (Khanal et al., 2019). This is done by offering discounts or other incentives in order to move more products than normal before the end of an accounting period. Another example includes hiding losses due to bad investments or poorly performing departments behind inflated numbers on their balance sheets (Alderman & Rezaee, 2016). Expense fraud typically occurs when false invoices are used as proof of transactions that never took place so firms can write off fictitious costs from their tax returns (Harvey et al., 2019). Lastly asset-related frauds involve inflating assets such as inventory levels through ghost entries into ledgers or overstating values assigned to certain items on balance sheets (Razavi et al., 2017) .
Examine how financial statement fraud schemes are carried out for informing detection and prevention methods
In terms of detection and prevention measures, there must be internal controls such as monitoring procedures and segregation of duties that are implemented from management level down throughout all departments in a firm(Khanal et al., 2019). Furthermore, external audits conducted by certified independent professionals should no longer just focus on testing the accuracy but rather look at why specific numbers were chosen for each category being examined – this involves understanding relationship between companies’ activities outside core operations which could lead them closer toward fraudulent practices(Balakrishnan et al., 2017). Finally investing heavily into IT systems could help reduce error rates without human intervention while monitoring potential red flags such as large spikes in sales within one quarter compared too previous years performance with same criteria applied across all periods being audited (Gleaton & Titterington , 2018 ).
To conclude coming up with effective ways against financial statement fraud requires everyone involved in decision making process including management team , auditors , shareholders and employees alike taking necessary steps towards preventing any potential abuse. Internal control systems need updating constantly according due diligence principles set out my national governing bodies regarding issuance/use/disposal processes associated with every transaction taking part involving money flows managed by firms themselves ensuring compliance across board under stricter oversight regulations being enforced regularly.(Alderman & Rezaee ,2016 ). For instance Companies Act 2006 sets out criminal offence applicable if an officer knowingly provides false information related representations made about companies true position resulting prosecution if found guilty serving prison sentence for extent misleading stakeholders would have had based upon info provided .