Financial statements are an important tool in measuring the financial health of a company. But in some cases, financial statements can be a means to commit financial fraud. Yes, in a company’s financial management, it is certainly not free from the risk of fraudulent financial statements or the bad intentions of someone who always wants to misuse company finances. This can be said to be a criminal act or commonly called fraud. If fraud in the company’s financial statements continues, it can put the company out of business. Therefore, as a businessman you must be vigilant about all possibilities of fraud including in the company’s financial statements. Don’t let just because you are busy thinking about business strategies, you don’t realize that there is fraud that harms your business. So, what are the frauds that often occur in company financial reports? How to deal with it? Come on, see the full explanation below!
Fraud or Fraud in Financial Statements
Based on The Association of Certified Fraud Examiners (ACFE), fraud or fraud is an unlawful act, which is carried out intentionally with a specific intention, such as manipulation or making false financial reports to other parties. This activity is usually carried out by individuals from inside or outside the company with the intention of obtaining personal or group benefits that harm other parties directly or indirectly. So that in the context of financial statements, fraud or fraud is carried out by management to cover up the actual financial condition of the company that does not apply the priority scale of financial statements and even to engineer the presentation of financial statements with the aim of obtaining personal benefits related to their position and responsibilities. The results of ACFE surveys and research show that every year an average of five percent of company revenues are victims of fraud. On the website of the Financial and Development Supervisory Agency (BPKP), private companies and even State-Owned Enterprises (BUMN) are not free from the risk of fraud. This can be seen from corruption cases involving SOE officials that have increased dramatically in the last two years.
What Are the Forms of Fraud in Financial Statements?
Talking about fraud in financial statements, of course we can easily mention examples of bad actors in relation to company finances. For example, bribing third parties for their own benefit (usually related to projects), buying personal items with company money, and embezzling funds. There is also the act of inflating claims or reimbursements. So, unscrupulous people will ask the company to reimburse a greater amount than the actual costs they have incurred. For example, he spent Rp1 million on a business trip, but asked the company for Rp1.5 million. The difference is taken from manipulation of payment receipts. In addition, here are some other types of financial statement fraud that can be committed by employees or management and harm the business:
Revenue Overstatement
Employees or management may record unearned revenue or inflate the actual amount of revenue. This can increase net income and give a false positive impression of the company’s performance.
Expense Understatement
Employees or management can hide or delay the recognition of expenses that should be recorded. This can increase net income and give a better picture of the company’s financial condition.
Inventory Manipulation
Employees or management may manipulate the value of the company’s inventory to create the impression of higher profits or greater asset value than is actually the case.
Financial Statement Forgery
Employees or management may falsify financial statements, including balance sheets, income statements, and cash flow statements, to hide fraud or improve the company’s financial condition.
Asset Valuation Manipulation
Employees or management may manipulate the valuation of assets, such as property or intellectual assets, to create the impression of higher value than they actually are.
Misuse of Company Funds (Embezzlement)
Employees or management may divert company funds for personal use, including theft of cash or use of funds for unauthorized purposes.
Contract and Transaction Fraud
Employees or management may commit fraud in contracts or transactions with third parties, such as concealing conflicts of interest or accepting bribes.
Collusion Forgery
Employees or management may collude with coworkers or outside parties to commit fraud in transactions or financial reporting.
Authorization Forgery
Authorized employees or management may forge signatures or authorizations to conduct unauthorized transactions.
Stock Price Manipulation.
Company management may try to influence the company’s share price by hiding or disclosing information that is detrimental to investors.
How to Address Fraud in Financial Statements?
In the end, fraud control is the responsibility of the company. In order to strengthen the anti-fraud culture in the company, several programs are needed, including strengthening the code of ethics, increasing awareness of fraud activities, the attitude of leaders, anti-fraud socialization, both internal and external to the company. Not only that, to ward off fraudulent financial statements and facilitate the disclosure of activities indicating corruption, business organizations also need to design a specific fraud control system. Here are some steps that can be taken to overcome fraud in the company’s financial statements:
Anti-Fraud Policy Creation
Create a clear and detailed anti-fraud policy and communicate it to all employees and management. This policy should include rules, procedures and guidelines that must be followed by all.
Training and Awareness
Socialize the anti-fraud policy and organize training to raise employee awareness on the importance of ethical integrity, and proper financial reporting.
Strict Internal Audit
Improve internal monitoring and auditing to detect potential fraud in accounting practices and financial statements.
Quick Investigation
If there are indications of fraud, immediately conduct an in-depth internal investigation, collect evidence, and follow up with appropriate action.
Regulatory Compliance and Business Ethics
Ensure that the company always complies with all applicable regulations and business ethics, and encourages a transparent and honest corporate culture in financial reporting.
KH Contact
This is an explanation of fraud in the company’s financial statements, including the types and ways to overcome them. In this regard, you can also consider using the services of a law firm with a pre-agreed legal retainer. This legal retainer can assist in investigating the fraud, providing legal advice and facilitating any necessary legal action.
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