What statements are key targets for this manipulation, and what accounts found in the statements are the main focus?
Misrepresentation of financial information is a serious offence and is one of the most common financial fraud carried out by businesses. The main financial statements targeted by this fraud are the cash flow statements, balance sheets, income statements, and statements of shareholder equity. Accounts such as accrued expenses accounts, accounts receivables and also payables were common culprits for misreporting that affect both the cashflows and income statements. Depreciation accounts in the balance sheet are also a common ground for misreporting. Other accounts include executive bonus accounts, loan accounts, loan interest accounts all of which were common in many of the financial misreporting frauds (US SEC, 2007).
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How can this fraudulent information be detected? What are the steps to prevent these actions?
Detection of fraudulent information can be done through some basic steps. First is determining areas of potential risks in a company, identifying the potential fraud schemes that may be carried out in these high-risk areas, and the finally identifying any red flags that are usually associated with these fraud schemes. The presence or absence of these red flags will then determine whether one will continue with the investigation for fraud or not (ACFE, 2020). The main steps to prevent these fraudulent actions would be to establish stringent internal controls that involve a number of departments and limit the control one individual or department has over a key area target for fraud. Another prevention method would be to ensure stiff punishments for those found guilty of fraud as this will act as a deterrent for others willing to commit the offence. Constant internal and external auditing of financial statements is also a key method of detecting and preventing such fraud.
What is the importance of SOX Section 404 to help with preventing fraud and fraudulent financial reporting?
SOX Section 404 has ensured that companies are forced to put in place stringent internal controls in addition to specific responsibilities for personnel in preventing fraud as a result leaving very few opportunities for fraud. The section has also been instrumental in ensuring all internal controls set up by companies serve the purpose of ensuring accuracy and reliability of all financial information published by the company (Ettredge, Li & Sun, 2006).
References
ACFE (2020 ). How to Detect and Prevent Financial Fraud. Association of Certified Fraud Examiners . Accessed 11 th April 2020 from https://www.acfe.com/uploadedFiles/Shared_Content/Products/Self-Study_CPE/How%20to%20Detect%20and%20Prevent%20Financial%20Statement%20Fraud%202017_Chapter%20Excerpt.pdf
Ettredge M. L, Li C. & Sun L. (2006). The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era. Auditing A Journal of Practice & Theory . Retrieved from https://www.researchgate.net/publication/275944644_The_Impact_of_SOX_Section_404_Internal_Control_Quality_Assessment_on_Audit_Delay_in_the_SOX_Era
US SEC (2007). Beginners Guide to Financial Statements. US Securities Exchange Commission. Retrieved from https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html
