United States

The investigation of financial statements for fraud

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A financial state­ment investigation is an investigation brought in response to concerns over fraud and misconduct that affect an entity’s financial statements, disclo­sures and public filings. The focus of a financial statement investigation is on evaluat­ing whether the financial statements or disclosures have been prepared in a way that misleads users. Doing so requires consideration of the rules that govern the basis of accounting and the form and content of the financial statements together with the elements of fraud.

As with the accounting rules that govern the preparation of financial statements, the elements of fraud might vary based on jurisdiction and whether the claim is brought as a civil or criminal action. The primary factor that differentiates fraud from error is whether the conduct that led to the misstatement is intentional.

Generally accepted auditing standards main­tain that there are two types of misstatements rele­vant in evaluating fraud: misstatements due to fraud­ulent financial reporting (FFR) and those stemming from the misappropriation of assets (MOA). Misstatements due to FFR are intentional misstatements or omis­sions of amounts or disclosures that are intended to mislead users, the result of which is that the finan­cial statements are not presented in accordance with generally accepted accounting principles (GAAP) in all material respects. Misstatements attributable to the MOA stem from the theft of an entity’s assets, the result of which is that the financial statements are not pre­sented in accordance with GAAP in all material respects.

Read a recent article published in the American Bankruptcy Institute’s ABI Journal by RSM US LLP’s Boris J. Steffen to understand the essence of a financial statement investigation, how to conduct an investigation, investigative techniques and the best way to report findings.

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