The red flags of financial statement fraud

Abstract

PURPOSE – According to the Association of Certified Fraud Examiners, financial statement fraud represents the smallest amount of fraud cases but results in the greatest monetary loss. The researcher previously investigated the characteristics of financial statement fraud and determined the presence of 16 fraud indicators. The purpose of this study is to establish whether investors and other stakeholders can detect and identify financial statement fraud using these characteristics in an analysis of a company’s annual report. DESIGN/METHODOLOGY/APPROACH – This study analyses a financial statement fraud case, using the same techniques that were previously applied, including horizontal, vertical and ratio analysis. These are preferred because stakeholders have relatively easy access to them. FINDINGS – The findings show several fraud characteristics, with a few additional ones not previously found prevalent. Financial statement fraud thus tends to differ between cases. It is also easier to detect and identify fraud indicators ex post facto. ORIGINALITY/VALUE – This study is a practical case showing that financial statement fraud can be detected and identified in the financial statements of companies that commit fraud.