Red flags signaling corporate fraud
Fraudulent financial reporting has been brought to the
forefront with companies such as Enron, WorldCom and Adelphia. The
U.S. Congress recently passed the Sarbanes-Oxley Act in part to combat
corporate fraud. Fraudulent reporting occurs for many reasons, such
as:
Conditions - Pressure on corporations to meet analysts' earnings
forecasts may play a significant role in the commission of corporate fraud.
Corporate Structure - An organization's corporate structure can
create an environment that increases the likelihood that fraudulent financial
reporting will occur. Attributes of the corporate governance structure
most likely to be associated with financial statement fraud are aggressiveness,
arrogance, cohesiveness and loyalty.
Choice - Management must choose between using ethical business strategies
to achieve continuous improvements in both quality and quantity of earnings
and engaging in illegitimate earnings management schemes to show earnings
stability or growth. The presence of any one of these can signal the possibility
of fraud.
Blakeley & Blakeley LLP - Trade Vendor Monthly News Flash - November
2002. This information is not intended to constitute legal advice, nor
a substitute for legal advice. once again link Blakeley & Blakeley
LLP.