In our company ForensicPro you can use services to identify the manipulation of financial statements, we work throughout Ukraine. Details by phone, which is indicated on the website.
Management and investment decisions are based on the analysis of financial statements data. The distortion of this data leads to misleading the user, which, as a result, becomes the reason for making erroneous decisions. Users who are deliberately misled in this way include business owners, investors and lenders, and representatives of regulatory authorities.
ForensicPro specialists offer their assistance in detecting and preventing distortion of financial statements. We often provide such assistance in combination with a number of other services to identify vulnerabilities in the structure of corporate governance and operational activities of the company. Timely noticed “danger symptoms” can prevent or significantly reduce financial and reputational losses.
Financial reporting manipulation
The Association of Certified Anti-Fraud Experts (ACFE) distinguishes three main types of misstatement of financial statements:
1. Overestimation of revenue
Examples of implementation: reflection of revenue without taking into account discounts / taxes / other required deductions, reflection of planned sales in the current period, sale of goods with the right to repurchase or other sales with a condition.
Alarming signals: an increase in revenue indicators without an increase in cash receipts, a sharp jump in revenue compared to competitors from the same business niche, overly complex transactions, especially closer to the period of financial close.
2. Incorrect valuation of assets and / or liabilities
Examples of implementation: manipulation of reserves / fair value of assets, changes in estimates or useful lives, recognition of assets to be written off. In a similar way, both an overestimation of the amount of equity capital and the reflection of fictitious losses can be carried out.
Alarms: negative cash flows on operations when reflected in profitability reports, the use of subjective judgments and / or complex justifications to determine the value of assets, income, expenses, falling demand, deterioration of the company’s position among competitors.
3. Understatement of costs
Examples of implementation: incorrect capitalization of expenses through reflection on the balance sheet as assets, concealment of certain expenses (liabilities) in general or reflection in the wrong period, reflection of expenses that form the cost of goods sold as non-operating expenses.
Alarms: a sharp increase in profit compared to competitors from the same business niche, an inexplicable increase in the cost of fixed assets, negative operating cash flows when reflected in the profitability statements.
In addition, other manipulation options are used. Among them:
- incorrect disclosure of information about liabilities, including warranty;
- carrying out complex transactions, including – using dubious counterparties, investment schemes, structured financing;
- the use of special-purpose companies, or “project companies” (the so-called SPE – Special-purpose entity).
For your information! The practice of distorting reporting is formed against the background of the dominance of management, the inconsistency of real transactions with their accounting form, as well as scandals, the appearance of a “shadow on the reputation” of the company.
Purposes of financial reporting manipulation
Changes to the reporting can be made for both external and internal users.
Artificial overstatement of assets is used to meet the requirements of banking institutions, as lenders, or for investors. We can also talk about compliance with the criteria of regulatory authorities or tax minimization.
There are fewer cases of tampering in reporting for the internal user. The most likely motive for distortions in this case is the personal circumstances of employees, the desire to receive bonuses and bonuses.
For your information! Juggling financial performance as a means to an end is considered only when the very possibility of such a violation in the company is admitted.
According to Donald Crassey’s “Triangle of Fraud” theory, pressure from investors or personal circumstances leads to adjustments to financial statements when corporate governance standards are not implemented in an organization and / or there is no internal control system.
How to detect distortion?
Detection of manipulation of financial statements is one of the areas of financial investigations (Forensic). Specialists use certain tools, as well as professional experience.
For your information! Analyzing reports, a specialist pays attention to the following points:
- “Imbalance” of indicators, for example: the indicator of the average salary for the organization does not correspond to the item of costs for wages and the number of employees;
- the financial results of the company do not at all correlate with the results of competitors who are engaged in the same type of activity;
- in the dynamics of reporting indicators from year to year, you can see errors and illogicality.
Based on this, the most effective technique for disclosing financial reporting manipulation is to test the analytical symptoms of events that are outside the scope of normal practice.
In accordance with the goals and established criteria, forensic specialists use several types of analytical procedures:
- correlation (vertical) analysis: a study of changes in the specific weight of an individual reporting item in the summary indicator;
- horizontal analysis: a study of deviations in the value of an individual article in comparison with the previous period;
- analysis of ratios / indicators: first of all – liquidity, turnover, and so on.
Important! In addition to direct verification of financial statements, the investigation evaluates non-financial information, primarily information about relationships with business partners / counterparties.
ForensicPro services for detecting manipulation of financial statements
Forensic specialists of ForensicPro conduct an investigation of corporate fraud, based on the results of which a report is drawn up, which reflects not only current deviations, but also “danger symptoms”. Identifying such vulnerabilities is a more effective way of ensuring the economic security of a company than eliminating the consequences of fraud after the fact.
Based on the results of the audit of financial statements, recommendations are developed for the implementation (optimization) of the internal control and corporate governance system. A working corporate governance system is the key to the prompt exchange of information and making the necessary decisions in response to alarms. An effective system of internal control is the factor of “narrowing” to a minimum of “loopholes” for manipulation by potential intruders.