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Revealed: Nine reasons businesses commit FSF and what you can do to prevent it

by , 03 December 2013
Financial Statement Fraud (FSF) is rife in many companies. This type of fraud happens when assets, revenues and profits are deliberately overstated. Or when liabilities, expenses and losses are intentionally understated in financial statements. Read on to find out why FSF is committed so you can take steps to prevent it...

The Practical Accountancy Loose Leaf says the most common reason businesses commit FSF is to make a company's earnings look better than they actually are.

But that's not the only reason…

Here are the other nine reasons businesses commit FSF

Businesses commit FSF:

  1. To encourage investment in their company shares;
  2. To show investors and analysts their increased earnings per share;
  3. To hide if the company can't generate cash flow;
  4. To drive out negative market perceptions;
  5. To get financing or better terms on existing financing;
  6. To get higher purchase prices for acquisitions;
  7. To show compliance with financing conditions and stipulations;
  8. To meet company goals and objectives; and
  9. To meet company projections and investor expectations

The Practical Accountancy Loose Leaf warns that while businesses commit FSF to get out of financial or liquidity problems, it's detrimental in the long run, because the person who makes these fraudulent recordings can face criminal charges.

Is there a way to prevent FSF in your company?

Yes.

For starters, you need to know that FSF usually happens if:

  • There isn't a board of directors;
  • There isn't proper oversight by the board of directors;
  • The internal controls environment's weak or nonexistent;
  • There is a complex set of transactions within the company; and
  • Managers rely on financial estimates or judgements.

When you look for fraud, don't just look at the numbers. Look at the bigger picture of the business. So look at these three areas in your company to prevent FSF in your business. In addition, lookout for this common FSF scheme.

Now that you know why businesses commit FSF, take steps to tighten your controls and prevent it from happening in your company.

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