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Watch out! If one of your managers fraudulently changes your financial statement, he could cost your company up to nine million rand

by , 19 December 2014
Financial statement fraud is when someone intentionally changes the information on your financial statement. They do this to misrepresent your company's financial position.

It's one of the lesser known types of business fraud. It's also one of the rarest types with only around 8% of fraud cases being financial statement fraud.

But, according to The Essential Fraud-Proof Business Guide it's by far one of the most expensive. The Guide says this type of fraud could cost your company up to nine million rand.

And the worst part is it's your senior managers that are most likely to commit this crime.

I'm sure you're wondering why someone would change the information on your financial statement and how it leads to such a catastrophic loss.

That's why today I'm going to tell you and show you how to protect yourself...

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Don't let your business be another fraud statistic...

Here's why managers commit financial statement fraud and how it causes a financial loss

There are two main reasons for financial statement fraud. The first is to hide a mistake and the second is to get some kind of financial gain. 
For example, let's say your company made a financial loss this year. But your senior accounts manager really wants his bonus and a raise because, after all, he didn't cause the financial loss. 
But you won't give out bonuses and raises because of the loss you made. So he decides to change your financial statement so it shows an increase instead. 
Now you think you made more money this year than you actually did. As a result, you happily hand out bonuses and raises. 
This causes two problems:
1. You don't know you lost money during the year so you won't know there's a problem. This leads to a repeat of the same problem in the next year; and

2. You give your employees money you don't have. 
Another example is if someone's stealing from your company but your accounts manager is too scared to report it in case he gets in trouble. So he changes your statement so you don't see the loss. 
This means you won't do anything to find out who's stealing from you and take steps to get your money back. 
These examples make it easy to see why someone commits financial statement fraud and how it causes such a massive loss. 
The problem is financial statement fraud takes a long time to detect. So how do you protect yourself?
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How to set up a good control environment
It's management's responsibility to emphasise the importance of the control system to all the staff members in the business. Management integrity (honesty, ethical standards, etc.) is key. The bottom line is that if management doesn't take internal controls seriously, all efforts will fail.
Use the checklist in chapter I02 of the Practical Accountancy Loose Leaf to ensure you have the right internal control environment in place to protect your business. In particular, you'll learn how to ensure your business has a sound control environment and how to prevent fraud in your Internet banking and your inventory.

Here's what you can do to protect your company against financial statement fraud

The best way to protect your company against financial statement fraud is to analyse all your financial statements each year.
Even if you don't have an accounting background you can still easily do this yourself. Just use these tools to analyse your financial statements. They'll help you spot any majorred flags in your financial statement. 
The Essential Fraud-Proof Business Guide contains a full list of all the red flags you need to watch out for.
To analyse your financial statements, convert the numbers into ratios or percentages. This will help you analyse the numbers based on their relationship to each other. It also lets you easily compare current and past performances. 
In a fraud investigation, the relationships and reasons for the changes are important to see if there are any irregularities.
If you spot any irregularities take action immediately. The best thing to do is to get a forensic accountant to help you track down the cause of the changes. 
This will help you stop this type of fraud in its tracks before you lose a massive amount of money. 
You can find nine more types of business fraud you need to look out for in The Essential Fraud-Proof Business Guide. The guide contains all the steps you need to take to make sure your business is 100% fraud-proof. 

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