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Three ways to help prevent Financial Statement Fraud in your company

by , 24 May 2013
Financial Statement Fraud (FSF) can cripple your business. When FSF is committed, it's usually by members of senior management or the executives with access to financial information like budgets, expense reports, income statements, trial balances and balance sheet. Here are three tips you can use to identify red flags in your company.

FSF is committed when your company's assets, revenues, and profits are deliberately overstated and liabilities, expenses and losses are deliberately understated in financial statements.

Some companies do this to get out of financial or liquidity problems. But, it's detrimental in the long run because the person who makes these fraudulent recordings can face criminal charges and drag your company down with him.

Prevent this from happening to your company by knowing which red flags point to FSF.

Look at these areas in your company to prevent FSF

The Practical Accountancy Loose Leaf says when you look for fraud, don't just look at the numbers. Look at the bigger picture of the business. Look at your company's:

  1. Management and the Board of Directors. What are their backgrounds? What motivations drive your management? What's their scope of influence? Also keep in mind that 'if management has ulterior motives, there are high chances of fraud,' warns the Loose Leaf.
  2. Your company's relationships with other entities. What kind of relationships does your company have with financial institutions, auditors, lawyers, investors and regulatory bodies? And most importantly, is the relationship disclosed and transparent?
  3. The organisation and its industry. How is your company structured? What are the unique characteristics about your company? How do these characteristics compare to your peers in the industry? When you do an analysis? It's good to compare how you're doing vs the market. If you're on par or slightly higher or lower than industry standard, you know you're in close proximity to the norm. But, if there's a significant difference between your company and its peers, find out why. 'This is particularly important to investors and fraud examiners,' warns the Loose Leaf.

Use these methods to help you prevent financial statement fraud in your company.

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