Detecting Accounting Fraud Before It's Too Late

CHAPTER 9Organizational Warning Signs and Nonfinancial Indicators

In the business world, the rearview mirror is always clearer than the windshield.

—Warren Buffett

9.1 WARNING SIGNS BEFORE A FRAUD OCCURS

Using the door to fraud, we can identify warning signs related to the organization, before a fraud occurs.

Motivation

There may be managers interested in showing that the company is doing better than it actually is. This can be due to a number of factors:

• To avoid having difficulties obtaining financing.
• Companies with loans that have cancellation clauses. They are companies that have to accomplish certain requirements in their accounts (profits, debts, liquidity, etc.) to prevent a bank loan being rescinded in advance. In these cases, there is more pressure for the accounts to reflect that the conditions agreed on are met.
• Companies in which analysts and rating agencies' opinions are worsening.
• To avoid reprobation or dismissal, in companies that exert a strong pressure to meet certain goals or budgets that very ambitious.
• To receive a bonus. According to PricewaterhouseCoopers (2010), this is the main incentive to commit frauds in companies.
• When a manager is soon leaving the company, there might be interest in transferring problems to those who'll take the reins in the future.
• A company that has to be sold in the near future. In these cases, sellers may be interested in offering a better image that raises the selling price. This can also happen in the IPO (initial public ...