Eight Tips to Reduce Fraud in Financial Reporting

As the pandemic and lockdowns continue, company leaders are juggling a variety of plates. Limited staff numbers working from home, manual and paper-based processes, and a lack of oversight create challenges in maintaining visibility. Unfortunately, this creates a variety of opportunities for nefarious actors both internal and external to defraud the organization.

Something we’ve discussed in detail over the past year, there are a wide range of ways that a company can be defrauded and a few warning signs companies need to look out for when people are committing it. Fraud isn’t going away, and with the new year well underway, the end of year reporting process could be a way for fraudsters to hide their activities or vigilant leaders to identify it.

But when it comes to financial statement fraud, there are certain things you should be looking for, according to the Anti-Fraud Collaboration. Analyzing SEC Enforcement actions related to accounting and auditing issues from 2014 through mid-2019, the report brings to light a variety of schemes used to commit this fraud, providing observations on higher risk areas that are susceptible to fraud and insights into what companies can do to identify and mitigate these types of fraud risks more effectively.

From discussing root causes, looking at the current landscape, and observing SEC data, the entire report provides a variety of insights and tips for leaders to eradicate fraud—and a recent Journal of Accountancy article offered eight tips and things to look for. Among the recommendations:

Prioritize High-Risk Areas: Focusing on components of the financial statements that are most often associated with fraud can reduce the risk. Revenue recognition, reserves manipulation, inventory misstatement and impairment are often among the areas of concern.
Review Pandemic Related Changes and Disclosures Carefully: Things continue to change, and it’s vital to keep a close eye on how these impact you. Be sure to know what will have a material impact.
Reinforce Your Culture: Tone at the top has long been a focus in fraud deterrence. The impact of culture on fraud is becoming more of an emphasis, particularly at large companies where the finance staff rarely interacts with top management.
Take the Pressure off People: When pushed to meet certain goals, staff may find themselves forced to manipulate numbers, particularly in the areas of revenue recognition and expense reporting. These areas need to be watched carefully by management and audit committees that are committed to accuracy.
Keep Your Staff Informed: There’s been a lot of change in the past few years. As standards change, be sure to train and educate staff on what everything means.
Professional Skepticism is Critical: While skepticism is a core competency for auditors, it may be a less familiar topic for audit committee members and management. Be sure that you’re asking the right questions and doing due diligence.
Prioritize Oversight: Management and the board need to ask the right questions, assess the identified risks, consider corporate culture, and pay attention to red flags, according to the report.
Use Analytics Where Possible: You’ve generated the data, make use of it. Samples only paint part of the picture, and the proliferation of analytics has made it easier to use bigger data sets.

Stay Vigilant

Especially in the wake of the COVID-19 pandemic, employees face immense pressure to keep food on the table. Paired with the opportunities that exist with less oversight, and the potential for fraud could skyrocket. As the leading resource for controllers looking to lead, we invite you to follow us for all the latest, join the discussion in our Slack channel, and join our rapidly growing community of Controllers Council members here.