Rich and Wealth

Companies at Risk for Fraud

In their most extreme form, creative accounting practices become fraudulent. As seen in this chapter, the costs to the shareholder or debt holder of a company whose financial statements are alleged to be fraudulent can be significant. In an effort to better prepare readers to either avoid such situations or at least reduce exposure to them, the attributes of companies that are more at risk for fraudulent financial reporting are summarized in Exhibit 4.8.

The attributes summarized here were drawn from a research report published by Beasley, Carcello, and Hermanson. The authors studied the details of 200 cases of alleged financial statement fraud using Accounting and Auditing Enforcement Releases filed by the Division of Enforcement of the SEC over the period 1987 to 1997. Some of the more noteworthy findings are summarized in the exhibit.

The findings are consistent with some of the thoughts expressed by Mr. Levitt in his speech “The Numbers Game” and reported earlier in this chapter.70 In particular, the exhibit indicates that a strong, independent board of directors and audit committee form an important cornerstone to any public company’s corporate governance structure. The remaining chapters of this book are devoted to helping the reader identify companies that are involved not only in potentially fraudulent financial reporting but instances of creative accounting practices, whether they result in allegations of fraud or not.

Taken From : The Financial Numbers Game