Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER NINETEEN

Fraud or Honest Mistake?

WHEN A RESTATEMENT OF A COMPANY'S financial statements is necessary, it is understood that the previously issued statements were not prepared in accordance with the accounting principles that the company claimed it used. But what is it that distinguishes a restatement from a fraud case?

When confronted with an accusation of financial statement fraud, a common response on the part of the perpetrator is that he or she was merely being aggressive in the interpretation of the applicable accounting principles in an effort to present the company's financial statements in the best light possible. There's nothing wrong with that, right?

One of the challenges presented to the fraud investigator is to prove that the material misstatement in the financial statements was caused not by an honest but overaggressive interpretation of the accounting standards, but by a deliberate misstatement designed to deceive readers.

THE “SMOKING GUN”

If the investigator is lucky, the white-collar crime equivalent of a smoking gun is found. There are two key elements of a smoking gun:

• The perpetrator is aware that the accounting treatment does not conform to applicable accounting principles.
• The perpetrator initiates the activity that violates the accounting principle (e.g., the individual makes or requests a journal entry that executes the fraud).

The smoking gun must be in the form of some record that can be traced to the individual. An e-mail message, for instance, ...