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Warning: FSF is more likely to happen in these five instances!

by , 19 August 2014
Ever heard of something called FSF?

It stands for Financial Statement Fraud and it happens when companies deliberately overstate assets, revenues and profits or understate liabilities, expenses and losses in their financial statements.

This type of fraud can cripple your business because, in the long run, you'll find that what's on your financial statements isn't a true reflection of how your business is doing. That's why we recommend you take a look at the five instances where FSF is more likely to happen so you can tighten your operations and prevent it.

Before we look at when FSF is more likely to happen, let's look at why businesses commit it

According to the Practical Accountancy Loose Leaf Service, businesses commit FSF to:

  • Encourage investment in their company shares;

  • Show investors/analysts their increased earnings per share;

  • Hide the fact that the company can't generate cash flow;

  • Drive out negative market perceptions;

  • Get financing or better terms on existing financing;

  • Get higher purchase prices for acquisitions;

  • Show compliance with financing conditions and terms;

  • Meet company goals and objectives; or

  • Meet company projections and investor expectations.

It's quite scary the lengths people will go to get more money.

Now let's look at when FSF is likely to happen…

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Five instances where FSF is more likely to happen

FSF usually happens if:

#1: There isn't a board of directors;

#2: There isn't proper oversight by the board of directors;

#3: The internal controls environment's weak or nonexistent;

#4: There're a complex set of transactions within the company; and

#5: Managers rely on financial estimates or judgments.

Luckily, you have the power to deal with the above scenarios so there's no chance for unscrupulous people to commit FSF. For example, you can appoint a board and make sure it safeguards the well-being of your company.

It's also a good idea to analyse your financial statements regularly to make sure nothing dodgy is going on.

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Warning: FSF is more likely to happen in these five instances!
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