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2 . Explains how existing opportunities and incentives for committing financial statement fraud in government translate into the rationalization of the fraudulent acts.OBJECTIVES To offer a conceptual framework To discuss the potential losses that result from fraud.

Theory is traced to the ultimate features of human action.METHODOLOGY PRAXEOLOGICAL METHOD .the logic of action for the branch of knowledge exemplified by economics Method concerned with conceptual analysis and logical implications of human action features. 3 .

accounts or other significant information.  Deliberate misapplication of accounting principles. omission or misrepresentation of events. These include misstatement arising from:  Fraudulent financial reporting  Misappropriation of asset Rezaee (2002)  Falsification. Thorhill and Wells (1993) Deliberate attempt to deceive or mislead another person or group by misrepresenting or omitting the amounts and disclosures of financial statement.DEFINITION OF FINANCIAL STATEMENTS FRAUD Intentional act that results in a material misstatement American Institute Of Certified Public Accountants (AICPA) SAS NO. 4 .99 in Financial Statement. or manipulation of material financial records  Material intentional. policies. alteration. transactions. and procedures.

Anthony (1985) US General Accounting Office (1993) Illustrating presence of opportunities and incentives to commit financial statement fraud. 5 . Not give consideration into rationalization of fraudulent acts.GAP / LIMITATION OF OTHER STUDIES Ziegenfuss (2001) Kahan (2002) Welch et al (1997) Majority of work on fraud in government has been centered on fraud in relation to misstatements arising from misappropriation of assets.

GOVERNMENT FINANCIAL REPORTING OBJECTIVES GAS B DIVERSITY OF RECIPIENTS Useful for economic. Constituents Cast vote 2. Legislative Bodies Appropriate decision 4.Bad image . Credit Rating Rating decision 5. Produce a small surplus regardless of whether such a surplus is an accurate reflection of operating performance during a year. 1. Creditors/Investors Investment decision 3. Management Incentive plan Deficit .Not live within it means High surplus – Taxes too high Users Purpose 6 . social and political decisions Factors To Drive Financial Statement Fraud Private       Tax savings Stock options Earning ceilings Credit rating Competition Reduce risk of price regulations User Of Financial Statement Government No.


8 . • Austrian theory of entrepreneurship add insight by extending information asymmetry and emphasizes in economics theory.a situation in which one party in a transaction has more or superior information compared to another. -More complex system will provide larger opportunities ##Asymmetric Information .AUSTRIAN ECONOMICS & RATIONALIZATION OF FINANCIAL STATEMENT FRAUD ENTREPRENUER • Through the lenses of Austrian theory of entrepreneurship • Government officials are using their entrepreneurial abilities to seek out opportunities. • Learning discovery to improve abilities to navigate new rules and layers of complexity.

OPPORTUNITIES IN FINANCIAL STATEMENT FRAUD Full Accrual Practices  Aggressive capitalization and amortization policies  Misreported assets and liabilities  Recognizing premature / fictitious revenue Fair Value Disclosure Derivatives/Options overvalue Long Implementation Intentional omission / misrepresentation of disclosures Slow development of best practices standard 9 .

INSTITUTIONS • Condition for people to act to achieve their goals. • Few actual economic incentives for rationalize financial statements fraud. 10 . • Rationalization of financial statements fraud driven by  individual benefits – added wealth/property  political benefit – elected officials.

INCENTIVES IN FINANCIAL STATEMENT FRAUD  Low risk of getting caught  Minimum level of penalties imposed  Lower level of scrutiny  Higher level of ambiguity in financial reporting practices 11 .

12 .EFFECTS OF FINANCIAL STATEMENT FRAUD TO GOVERNMENT 1 Disrepair and useless fixed asset for future generation 2 3 4 Pressure on future taxes and borrowings 5 6 Citizen confidence and welfare drops Debt burden on future generation Investor or creditor confidence drops Political parties and incumbents can also suffer when gross misinformation is revealed.

 Government has its own institutional limitation – lack of private property incentives. 13 .  Financial statement fraud has its origin in political rather than economic incentives.  Financial statement fraud is rationalized by elected rather than nonelected officials.CONCLUSION  Prospect of financial statement fraud can be described in terms of government official’s alertness to opportunities for engaging in financial statement fraud and willingness to seize them.  Detection process of financial statement fraud in government tend to exhibit less alertness compare to private sector.

The Preparedness Of The Accountants From The Malaysian Accountant General’s Department In Moving Towards Accruals Accounting (Muhammad Iqbal Bin Mohamed Azhari (2013) 14 .