Financial Statement Fraud
There are many things that can motivate financial statement fraud. Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the Chief Executive Officer and Chief Financial Officer.
A person in such positions as CEO and CFO can be motivated to commit financial statement fraud because of perceived personal or corporate pressures such as maintaining personal income or wealth that stems from living beyond their means, preserving status or control- whether it be the company or a department within the company, particularly if bad performance will lead to termination, or to conceal true business performance especially if the company isn’t performing well. Another pressure could be financial goals placed on the company as a whole or through its departments. The most consistent pressure for top executives is that they sometimes find it hard to meet Wall Street expectations. Instead of admitting they are unable to meet the expectations they “cook the books” to make it appear as if the company reached its financial goals.
Perceived opportunity occurs when the fraudster thinks that they can commit the crime without being caught. Opportunities can stem from a variety of places in the work industry. Fraud opportunity will only exist with the knowledge of general information and technical skill. General information can come from the fraudster knowing the ends and outs of the company. Technical skills can be more difficult and be done through the company’s financial statements from top executives such as the CEO and CFO. There are numerous fraud schemes that are committed these days and they all give the fraudster that perceived opportunity.
Under such circumstances, a fraudster can rationalized why committing such a crime is justifiable. The fraudster may believe that money is owed to them for doing such a great job, it’s their company, it’s only for a short period of time and it isn’t hurting anyone. A fraudster may commit financial statement fraud do to pressures from Wall Street and may justify his actions because he believes that the company cannot let investors and the public down. They want to believe that what they are doing is in the best interest for the stakeholders. These corporate officials may also be carrying around big egos that won’t allow them to fail.
When it comes to financial statement fraud, I think public companies that try to meet Wall Street expectations feel a certain pressure to commit fraud if they cannot meet the goals that are set. “The average estimate of a public company’s quarterly earnings and revenues, derived from forecasts of securities analysts who provide research coverage on the company. The Street expectation is a closely watched number that assumes prominence during the period when most public companies report their results.” The investors use these factors to influence their choices. So with this being a deciding factor in their decisions as whether to invest or not could be pressure to “cook the books” if a company isn’t performing well. And in the fraudster’s mind it is justifiable. Their rationalization is that they are...
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