Creative Accounting or Financial Statement Fraud?


Companies engaged in financial statement fraud sometimes use creative phrases to legitimize or cover up what they’re doing. Examples include:

  • Aggressive accounting – We’re following the rules, but pushing the limits to make the financial statements look as good as possible.
  • Earnings management – We’re doing our best to “manage” earnings and make sure that the numbers are in line with the expectations of investors.
  • Income smoothing – We’re leveling out the earnings to keep the numbers consistent from period to period.

This “creative” accounting is sometimes justified by people who say that the company is still following the rules, and just using the rules to their benefit.

Aggressive practices like this often cross the line into fraud, as companies are purposely manipulating the numbers to paint the picture they want to see, rather than show the reality of the numbers.

Financial Statement Fraud: The Damage Inflicted


Financial statement fraud impacts any person or organization that has a financial interest in the success or failure of a company. A manipulation of the company’s reported earnings or assets can affect a bank that extends credit to the company, a shareholder who invests money in the company, and those organizations that enter into contracts or agreements with the company.

The manipulation of financial statements also affects employees. It has the power to put employees out of work once the fraud is exposed or collapses. It also has the power to enrich employees – mostly those involved in the fraud, but potentially those who are not. Good financial results (actual or fabricated) can be linked to promotions, raises, enhanced benefit packages, bonuses, and the value of stock option awards. Continue reading

Financial Statement Fraud: How It Is Done


Financial statement fraud happens is one of the most costly types of fraud. It is a significant problem because people inside and outside the company rely on the information provided in the financial statements. They assess the financial results and make predictions and decisions about the future of the company based on those results.

Upper management or company owners are the ones who are usually responsible for financial statement fraud. Executives are entrusted with entire companies. They have access to nearly all data and employees, and they can exploit this access to commit and conceal fraud.

The power the executive has by virtue of her or his position in the company is closely linked with the high cost of financial statement fraud. Power and access within a company make it possible for larger frauds to be committed and covered up. Continue reading

Navistar v Deloitte: Blame the Auditors for Fraud Committed and Concealed By Employees


In cases of corporate fraud, including embezzlement, financial statement fraud, earnings management, bribery, and the like, it’s easy to blame the auditors. After all, they have very deep pockets, often with large malpractice policies.

Even though the task of auditors is usually well-defined and agreed-to by shareholders, management, and the board of directors, it doesn’t seem to matter to them that the financial statement auditors aren’t responsible to find fraud during their audits. People quickly forget that the auditors disclaim responsibility for finding fraud multiple times before, during, and after the audits, and that management is ultimately responsible for preventing and detecting fraud in their own companies.

Last week Navistar sued their former auditors, Deloitte & Touche, for fraud, fraudulent concealment, breach of contract, and malpractice.  The lawyers say Deloitte lied about its competency in performing audits, and the company ultimately restated its financial statements for 2002 through 2005.  Whose fault is it that Navistar overstated its pre-tax income by $137 during those years? According to them, Deloitte. Continue reading

Manipulation of Earnings in Press Release (Are You Surprised?)


Overstock Patrick BryneToday convicted felon Sam Antar has an exciting piece on his blog about (NASDAQ:OSTK) and how it fudged its earnings figures in Friday’s press release, caused a short squeeze right before options expired, and continued on Patrick Byrne’s path of misleading investors.

It all began with a press release reporting 2008 earnings, saying that total revenue was $200.7 million versus $157.9 million for the same period in 2007, which was a 27% increase.

Of course, those figures were not on the up-and-up. *gasp*

The comparison of the revenue figures was faulty because 2008 figures were calculated on a GAAP basis, while 2007 figures were on a non-GAAP basis. The 2008 figures included revenue that would have been part of 2007 using Overstock’s non-GAAP reporting methodology. (So 2008 figures were bumped up, when compared to 2007 figures.) Continue reading