Elements of Financial Statement Fraud

Elements_of_financial_statementsBy Monica Hubler, Full-Time Faculty, Kaplan University  
Published June 2016

Fraud comes in many forms, including bribery, kickbacks, billing fraud, payroll fraud,and more. Perpetrators plan and commit fraud to benefit themselves, despite the risk of being caught. Most seek personal reward such as a bonus for increased earnings per share through increase of net income, while others may have a plan to ruin the company.  However, when it comes to financial statement fraud, this process will not benefit anyone. It only causes issues with shareholders and potential investors, plus sanctions from the SEC against those committing the fraud.  

Elements Used for Financial Statement Fraud

One element of financial statement fraud is fictitious revenue and sales, such as revenues that have not been completed and are not ready to be recognized. This manipulation involves sending products out that were not ordered, but were billed. Another method is a phantom revenue posting, a scheme in which a company will post to revenue items that are under consignment. A company can also manipulate its assets by stating that equipment is leased as an operating lease when it is really a capital lease. 

Yet another method is misappropriation of postings of transactions or inclusion of false expenses. This is done to hide or mask theft or embezzlement and it is done for purely personal reasons. There are other methods of changing the numbers, such as concealment of liabilities, in which liabilities are kept off the balance sheet, and overstatement of revenue by recording those uncertain sales.

Financial fraud is also committed by managers of the company to help increase the value of the company. This is a concern with the SEC, which is presently expanding its efforts to prosecute more companies and managers for fraud.

When a business assembles its financial statements, it wants to project itself in the best light possible and entice investors to review and invest. However, some businesses issue fraudulent financial statements that mislead investors. The SEC has stepped up their reaction to these fraudulent statements and the companies who commit fraud. Does anyone remember Enron?

Monica Hubler, is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.


Herrfeldt, B. (2014) What Is Financial Statement Fraud? Retrieved from http://www.ehow.com/about_5061193_financial-statement-fraud.html?ref=Track2&utm_source=ask

Wolfe, M. (2014) Types of Financial Statement Fraud. Retrieved from http://www.ehow.com/list_7396545_types-financial-statement-fraud.html 

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