Financial Statements FraudPertemuan XXII

Matakuliah : F0184/Audit atas KecuranganTahun : 2007

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• Mahasiswa diharapkan dapat melakukan analisa terjadinya sebuah kecurangan dalam pelaporan keuangan

• Mahasiswa diharapkan mengetahui ancaman yang dapat terjadi dalam aktivitas pelaporan keuangan

Learning Outcomes

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• Fraud Definition• Red Flag of Financial Statements• Methodologies of financial statements fraud

– Earning Manipulation– Earning Management– Balance Sheet Manipulation

Outline Materi

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DefinitionSEC define as:It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate commerce, or the mails, or of any facility of any national securities exchange,

a)To employ any device, scheme, or artifice to defraudb)To make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading, or

c) To engage in any act, practice, or course of business which operates or would operate as a fraud

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Definition (Con’t)SAS No. 82 state:“Misstatement arising from fraudulent financial

reporting are intentional misstatement or omissions of amounts or disclosures in financial statements to deceive financial statements user.”

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Red FlagSAS No. 82 has listed 25 red flags related with fraudulent financial reporting that put into three categories:

Management characteristic and influence over the control environment

Industry conditions

Operating and financial stability characteristic

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Red Flag (Con’t)SAS no.82 supersede by SAS No. 99 in 2002. In here the red flag is put into different categorization:Incentives and pressures on management to commit fraud

Opportunities to commit fraud

The attitudes and rationalizations found among those who commit fraud

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Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting

Incentives / Pressure

1. Conditions that threatening Financial stability:– High Competition with declining margins– High vulnerability of rapid changes– Significant declines in demand and increasing business

failure– Threat of bankruptcy, foreclosure or hostile takeover

imminent– Negative or unable to generate cash flow– Rapid growth or unusual profitability– New accounting, statutory, or regulatory requirements

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2. Excessive pressure for managements are:– Profit expectation from analyst, investors, creditors and

external parties– Require additional debt or equity– Fail to meet debt repayment – Significant pending transaction

3. Financial performance entities that threatening are:– Significant financial interest– Significant portions of their compensation being

contingent upon achieving targets– Personal guarantees of debts

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4. Excessive pressure on management to meet goals that set up by board of directors

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Opportunities

1. Fraudulent financial reporting can arise from:– Related party transaction or transaction not audited– Strong financial presence or ability to dominate the industry

sector– Subjective judgments or uncertain estimation that are difficult

to corroborate– Significant, unusual or highly complex transactions– Significant operations with different business environments

and cultures exist– Significant bank accounts or subsidiaries or branch operations

in a jurisdictions where no clear business justification

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2. The result of ineffective monitoring are:– Domination of a person or small group– Ineffective oversight over financial reporting process

and internal control

3. Evidence of complex or unstable organizational structure, are:– Undetermined controlling over organizational or person – Overly complex organizational structure– High turnover

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4. Cause of deficient internal control are:– Inadequate monitoring of control– Ineffective accounting and information systems

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Attitudes / Rationalization

Indication of risk factors are:

– Ineffective communication, implementation, support or enforcement of value or ethical standard or miscommunications

– Excessive participation of non-financial management’s– Known history of violations of laws and regulation or claim against

other– Excessive interest to increase earning trend– Committed to achieve aggressive or unrealistic forecast – Failing to correct conditions on timely basis– Employing inappropriate way to minimal reported earning for tax

reasons

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8. Attempts to justify incorrect accounting9. Improper relationship between management and auditor,

can be caused by:– Frequent disputes– Unreasonable demands on the auditors– Formal or informal restrictions on the auditor– Dominant management behavior in dealing with auditor