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Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

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.

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