Financial statement fraud

Definition

Financial statement fraud involves the intentional misrepresentation of financial information to deceive stakeholders. This typically includes manipulating earnings, inflating assets, or hiding liabilities to present a misleading picture of a company's financial health.

5 Must Know Facts For Your Next Test

1. Financial statement fraud is often committed by management to meet financial targets or performance expectations.
2. Common techniques of financial statement fraud include revenue recognition schemes, expense understatement, and asset overstatement.
3. The Sarbanes-Oxley Act (SOX) was enacted in 2002 to combat corporate fraud and includes provisions for stringent internal controls and auditor independence.
4. Section 302 of SOX requires senior management to certify the accuracy of financial statements personally.
5. Penalties for committing financial statement fraud can include fines, imprisonment, and severe reputational damage.

Review Questions

• What are some common techniques used in financial statement fraud?
• How does the Sarbanes-Oxley Act aim to prevent financial statement fraud?
• What are the potential consequences for individuals found guilty of committing financial statement fraud?

Related terms

Internal Controls: Processes designed to ensure the integrity of financial and accounting information.

Sarbanes-Oxley Act: A U.S. law passed in 2002 aimed at improving corporate governance and accountability.

Earnings Management: The use of accounting techniques to produce financial reports that paint an overly positive picture of a company's business activities.