Financial statements provide information regarding financial position, financial performance and cash flows of an enterprise, be it individual, partnership or corporation. It provides an overview of an enterprise’s financial condition, both short and long term. The four basic financial statements are the balance sheet, income statement, statement of retained earnings, and statement of cash flows and occasionally a fifth one, notes to financial statements which describe each item on the four other statements in further detail. Manipulation of these statements is the core of financial statement fraud.
Financial statement fraud is the intentional and deliberate manipulation of the data present in the financial statements, hereby causing a reader to make a decision that would be different had the data would have been otherwise. Material facts in the financial statements are omitted, reduced or increased. Types of financial statement fraud are: revenue recognition, improper disclosures, manipulation of expenses, asset manipulation, liability manipulation, manipulation of reserves, and many more. It has been studied and confirmed that the most common type committed is revenue recognition.
There are three main factors which are believed to be the main catalyst in influencing the occurrence of financial statement fraud. They are conditions, corporate structure and choice. When conditions provide for favorable results, financial statement fraud will be committed. When the corporate structure especially top management endorses financial statement fraud for purposes like keeping the stock market people happy, it will also likely be committed. Finally, financial statement fraud is committed by choice; when management opts to report false data rather than what is real, masking the company’s true financial standing.