Ensuring the Quality of a Financial Statement

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Table of Contents

Introduction
Potential Problem 1: Fictitious Revenues
Potential Problem 2: Improper Disclosure
Potential Problem 3: Endorsed Book Inflation
Conclusion
References

Introduction

Employees at different levels may affect a firm’s financial statement, and this kind of fraudulent activity results in a loss of revenue, public confidence, and company morale, as well as possibly incurring higher audit fees. Finding appropriate ways to combat possible deception in a company’s financial statement through legitimate means becomes an essential aspect of a managerial position, made possible through the institution of working policies. However, organizing effective fraud-preventing strategies requires acknowledging the most common problems and situations that may occur when reporting accounting information.

Potential Problem 1: Fictitious Revenues

A company may increase its profits to seem more fortunate, necessitating balancing out this change in the next statement, creating a continuous loop of revenue addition and subtraction. Rahman, Sulaiman, Fadel, and Kazemian (2016) have identified that numerous Malaysian firms partake in this kind of profit fluctuation. Resolving this issue may be possible through the institution of a strict policy of “FASB ASC 605” adherence, which necessitates the existence of arrangement, delivery, price, and collectability evidence (Wells, 2017, p. 332). Therefore, aiding the situation becomes viable through the establishment of a rigid procedure, which must be accompanied by independent, non-accounting managers’ supervision, with real repercussions for policy non-adherence.

Potential Problem 2: Improper Disclosure

On a managerial level, manipulating the required by law disclosure to suit a company’s needs and status becomes another acute issue. Some research has found that despite the institution of Securities and Exchange Commission’s regulations, most managers do not alter their disclosure rates, which may affect the way clients perceive a company (Wheeler, Cereola, & Louwers, 2014). These findings permit stating that companies must establish control over their finances internally, rather than solely from external sources, to achieve stellar results. Creating viable lines of communication between those, who are privy to managers’ actions and those, who can enact specific disciplinary actions, becomes an essential part of preventing improper managerial disclosure.

Potential Problem 3: Endorsed Book Inflation

Any business invests in securing an adequately high revenue, but while some may do this through hard work, other firms may rely on fraud to increase their status. CEOs may even endorse this kind of activity to “exceed Wall Street expectations of the business and create inflated market prices for the business” (Peters & Maniam, 2016, p. 107). While frequent scandals may identify audits as a method that is not always successful, in this kind of scenario, where CEOs support fraudulent activity, inviting outside scrutiny may be the best course of action (Krambia-Kapardis, 2016). Therefore, as a manager in this kind of company atmosphere, it would be necessary to rely on policies that create communication lines that can contact extensive external support.

Conclusion

Acknowledging the impact of various factors on the recurrence of fraud permits identifying its early stages and preventing its continuation. While a non-accounting manager may only have a certain amount of options, helping the situation by adhering to an ethically motivated set of principles permits achieving adequate success. Through the implementation of both internal and external controls, a correct financial statement may be secured, allowing the company to conduct business without losing clients’ trust.

References

Krambia-Kapardis, M. (2016). Corporate fraud and corruption: A holistic approach to preventing financial crises. New York, NY: Palgrave Macmillan.

Peters, S., & Maniam, B. (2016). Corporate fraud and employee theft: Impacts and costs on business. Journal of Business and Behavioral Sciences, 28(2), 104-117. Web.

Rahman, R. A., Sulaiman, S., Fadel, E. S., & Kazemian, S. (2016). Earnings management and fraudulent financial reporting: The Malaysian story. Journal of Modern Accounting and Auditing, 12(2), 91-101. Web.

Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection (5th ed.). Hoboken, NJ: John Wiley & Sons, Inc.

Wheeler, S. W., Cereola, S. J., & Louwers, T. J. (2014). MD&A disclosure tendencies: The case of LIFO liquidations. Accounting Horizons, 28(4), 805-818.

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Ensuring the Quality of a Financial Statement

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