Rice Business Report September 2019 September 2019 Rice Business Report | Page 7

Rice Business Report September 2019
Fraud Detection and Prevention in Financial Reporting - Is It the Auditors' Responsibility?
By Desmond Aidoo
The issue of fraud has been in existence for ages leading to the collapse of most businesses due to mis-
leading financial reporting and misappropriation of funds. It has also questioned the integrity of some
key industry players as well as major accounting firms. Unfortunately, fraud is not in any physical form
such that it can easily be seen or held. It refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the use of decep-
tion to obtain an unjust or illegal advantage.
According to the Association of Certified Fraud Examiners, fraud is defined as any intentional or deliber-
ate act to deprive another of property or money by guile, deception, or other unfair means. It classifies
fraud as follows:
Corruption: conflicts of interest, bribery, illegal gratuities, and economic extortion.
Cash asset misappropriation: larceny, skimming, check tampering, and fraudulent disbursements, in-
cluding billing, payroll, and expense reimbursement schemes.
Non-cash asset misappropriation: larceny, false asset requisitions, destruction, removal or inappropri-
ate use of records and equipment, inappropriate disclosure of confidential information, and document
forgery or alteration.
Fraudulent statements: financial reporting, employment credentials, and external reporting.
Fraudulent actions by customers, vendors or other parties include bribes or inducements, and fraudu-
lent (rather than erroneous) invoices from a supplier or information from a customer
Fraud involves the motivation to commit fraud and a perceived opportunity to do so. A perceived op-
portunity for fraudulent financial reporting or misappropriation of assets may exist when an individual
believes internal control could be circumvented, for example, because the individual is in a position of
trust or has knowledge of specific weaknesses in the internal control system. Fraud is generally fuelled
by three variables: pressures, opportunity and rationalization as depicted in the diagram.
There is the need to distinguish between fraud and error in financial statement preparation and re-
porting. The distinguishing factor between fraud and error is whether the underlying action that results
in the misstatement in the financial statements is intentional or unintentional. Unlike error, fraud is
intentional and usually involves deliberate concealment of the facts. Error refers to an unintentional
misstatement in the financial statements, including the omission of an amount or disclosure.
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