After studying this chapter, you should be able to:

11-1 Define fraud as it relates to financial statements
11-2 Identify the three main groups of people who commit financial statement fraud
11-3 List the three primary reasons people commit financial statement fraud
11-4 Describe the three general methods used to commit financial statement fraud
11-5 Define overstatements
11-6 Define understatements
11-7 Describe the conceptual framework for financial reporting
11-8 List examples of various types of financial statements


In this chapter, we will examine some underlying principles that permit financial statement frauds to occur. Additionally, we will summarize the key provisions of the Sarbanes–Oxley Act, designed to deter these offenses. Financial statement frauds are caused by a number of factors occurring at the same time, the most significant of which is the pressure on upper management to show earnings. Preparing false financial statements is made easier by the subjective nature of the way books and records are kept. The accounting profession has long recognized that, to a large extent, accounting is a somewhat arbitrary process, subject to judgment. The profession also indirectly recognizes that numbers are subject to manipulation. After all, a debit on a company's books can be recorded as either an expense or an asset. A credit can be a liability or equity. Therefore, ...

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