How To Detect And Prevent Financial Statement Fraud
Every publicly traded company is required to submit financial reports annually for auditing. This is especially crucial today due to the increasing number of fraud cases related to financial statements year after year. Instances of such fraud include asset misappropriation and embezzlement. All this is done to delay losses until some issues can be resolved or to boost a company’s reputation by misleading prospective investors.
With that said, how best can you detect and prevent financial statement fraud? Read on as this guide below looks at how you can do this and safeguard yourself from becoming another victim of fraud. Let’s get started.
What Is Financial Statement Fraud?
Financial statement fraud refers to manipulating your company’s financial statements. You can commit financial statement fraud by overstating or excluding crucial financial information. In most cases, this is done to develop a positive image of the company:
- Financial status
- Cash flow
- Performance
Senior management is the usual suspect in this type of fraud. They commit fraud to protect their interests, such as retaining leadership.
What Are The Different Ways To Detect And Prevent Financial Statement Fraud?
There are many ways you can detect financial statement fraud, such as:
- Segregation Of Duties
This form of internal control helps you prevent financial statement fraud. Segregation of duties ensures every employee has different tasks to minimize the chances of committing financial statement fraud and theft of other company assets.
You might wonder why segregation of duties is important. Segregating duties allows you to detect and prevent fraud and errors before they occur. With that in mind, some of the tasks you should consider segregating include the following:
- Preparing financial statements
- Writing checks
- Handling deposits and cash receipts
- Preparing deposits
- Reconciling deposits, among other transactions
- Receiving cash or checks
These tasks need to be divided among different employees. And it’s an effective way to deter individuals from committing financial misconduct. Segregating duties are among the most practical internal controls for detecting and preventing these types of issues. But it is challenging to implement, especially if your company has inadequate resources. This will limit you from hiring more workers and make segregating duties more challenging.
As much as this might be a significant challenge, you can still divide responsibilities among your employees and ensure everything works out perfectly.
- Establish A Fraud Hotline
With a fraud hotline, employees can confidently report financial statement fraud. When employees feel protected and safe, they won’t hesitate to report anything suspicious.
You must also understand that insiders are in a better position to help you detect and prevent financial statement fraud. Remember to allow your callers to remain anonymous to encourage employees to use the hotline freely without fearing they might be held accountable for reporting.
- Hire An External Auditor
Auditors will work toward accurately evaluating your company’s financial status to ensure smooth operations. External auditors are certified public accountants (CPAs) who will review the financial statements prepared by your company’s management.
With an external auditor, you’ll be able to tell if your company’s financial statements are true and accurate. If the external audit doesn’t match your internal audit, you can detect fraud and prevent it before it negatively impacts your organization.
By investing in external auditors, your company will also gain public trust. This is because investors will be assured of your company’s commitment to the business plan you presented during the investment period. But before hiring a professional external auditor, ensure you check on their reputation regarding trustworthiness and quality service.
- Expand The Board Of Directors’ Oversight
The most comprehensive way to detect and prevent financial statement fraud in your company is by expanding the board of directors’ oversight of your entire company’s management and operations, which may include:
- Working toward hiring and approving consultants, such as independent auditors, who will present the company with annual financial statements.
- Examining the check register.
- Evaluating the executive director’s and C-suite’s performance depending on their job description.
- Comparing your company’s actual revenue and how it’s spent on budgeted expenses. This helps in identifying errors, mismatches, and discrepancies.
- Approve policies, major expenditures, and financial procedure documents.
Takeaway
Knowing how to detect and prevent financial statement fraud is crucial to protecting the company’s financial assets and enhancing security. Thus, consider implementing the measures mentioned above to avoid fraudulent activities in your organization.
If you’re complicit in financial statement fraud, you’re likely to face lawsuits, penalties, closure,
