by Craig Hannaford, CGA
In a recent case investigated by the Royal Canadian Mounted Police (RCMP), the senior executives of a publicly traded company were charged with fraud related to the financial statements of the company. The RCMP stated that the accused created an elaborate scheme of paper trails that exaggerated the financial position and the performance of the company in order to mislead investors, creditors and auditors. Revenues were overstated in successive quarters, false sales were recorded in the accounting records and high interest loans were not recorded. The company eventually went into bankruptcy, at which point the deception was uncovered. Creditors and investors lost millions and employees suffered through unpaid wages.
Financial statement fraud is the deliberate misrepresentation of the financial condition of an enterprise. Its intent is to deceive financial statements users (e.g., shareholders, creditors, regulators). It has many forms and guises, but is perpetrated through intentional misstatements or omissions of amounts in financial statements. It occurs in large publicly traded companies. It occurs in small family-owned firms. CGAs should be aware of the red flags that may indicate the presence of financial statement fraud and then make the appropriate examination to determine if their concerns are warranted. It is often the small extra inquiry by an accounting professional that exposes the presence of financial statement fraud.