Meeting with Company A JUNE 15, 2021 - 18H

JULY 11, 2021 - 11H Meeting with Company A

Meeting with Company A JUNE 15, 2021 - 15H
AUGUST 8, 2021 - 16H Meeting with Company A
// APRIL
Meeting with Company2021
A JUNE 15, 2021 - 15H
RIL 15, 2021 - 15H Meeting with Company A
ing with Company A

ACCOUNTING PRINCIPLES
AND FRAUD
By group 4 : JUNE 15, 2021 - 18H
1. Luis Wijaya 023001801001 Meeting with Company A
2. Raissa Stephanie 023001801130 JUNE 15, 2021 - 15H
3. Jacqueline Lewaney 023001801191 Meeting with Company A
JUNE 15, 2021 - 15H
Meeting with Company A
MARCH 22, 2021 - 15H
 Table Of Contents
● Fraud In Financial Statements
● Conceptual Framework For Financial Reporting
● Responsibility For Financial Statements
● Users Of Financial Statements
● Types Of Financial Statements
● The Sarbanes - Oxley Act Of 2002
● Financial Statement Fraud Data From The ACFE 2011 Global
Fraud Survey
FRAUD IN FINANCIAL
STATEMENTS
Who Commits Financial Statement Fraud?

SENIOR MANAGEMENT

MID & LOWER LEVEL

MID AND MANAGEMENT
LOWER LEVEL MANAGEMENT

ORGANIZED CRIMINALS
ORGANIZED CRIMINALS
 Why Do People Commit Financial Statement Fraud?

Senior managers and business owners may “cook the books” for several key reasons:

● To conceal true business performance.

● To preserve personal status/control.
● To maintain personal income/wealth
 How Do People Commit Financial Statement Fraud?

● Playing the accounting roles

The fraudster uses the accounting system as a tool to generate the results he wants. For example, in order to increase or decrease earnings to a
desired figure, a fraudster might manipulate the assumptions used to calculate depreciation charges, allowances for bad debts, or allowances for
excess and obsolete inventory.
● Beating the accounting system
The fraudster feeds false and fictitious information into the accounting system to manipulate reported results by an amount greater than can be
achieved by simply “playing the accounting system.”
● Going outside the accounting system
The fraudster produces whatever financial statements he wishes. These financial statements could be based on the results of an accounting and
financial reporting process for an operating entity, with additional manual adjustments to achieve the results desired by the fraudster.
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
CONCEPTUAL FRAMEWORK
Conceptual framework for financial reporting :

I. Recognition and measurement concepts

A. Assumptions
i. Economic entity
ii. Going concern
iii. Monetary unit
iv. Periodicity
B. Principles
i. Historical cost
ii. Revenue recognition
iii. Matching
iv. Full disclosure
C. Constraints
i. Cost-benefit
ii. Materiality
iii. Industry practice
iv. Conservatism
II. Qualitative characteristics
A. Relevance and reliability
B. Comparability and consistency
CONCEPTUAL FRAMEWORK
ECONOMIC ENTITY
The concept of the entity is becoming ever more
difficult to define. Enron has raised further questions
about how to account for the entity in order to
prevent fraudulent manipulation of the financial
statements.
GOING CONCERN
In valuing a firm's assets, it is assumed that the
business is one that will continue into the future. Fraud
in the going concern concept will usually result from
attempts to conceal terminal business condition. If
there is serious doubt about whether a business can
continue, this must be disclosed. Management has a
duty to inform the accountants of the business's future
ability to earn money.
CONCEPTUAL FRAMEWORK

MONETARY UNIT PERIODICITY

In order to measure and analyze financial transactions, a
common standard is necessary. In our society, that common
denominator is money. The U.S. dollar has remained reasonably
stable, but some countries, as a result of persistent economic
volatility, use “inflation accounting” to adjust for price-level
changes in their currency. International companies that deal
with foreign currency transactions may be subject to fraudulent
abuse of monetary exchange rates.
This “time period” assumption advises that economic
activity be divided into specific time intervals, such as
monthly, quarterly, and annually. With shorter
reporting periods, however, the data tends to be subject
to greater human error and manipulation and,
therefore, is less reliable.
CONCEPTUAL FRAMEWORK
HISTORICAL COST
GAAP requires that assets be carried on the financial
statements at the price established by the exchange
transaction. However, there are some exceptions to
the historical cost principle. For example, if
inventory is worth less than its cost, this lower value
is to be reported.
REVENUE RECOGNITION
According to generally accepted accounting principles,
the accrual basis of accounting should be used for
financial reporting. As such, revenues are recognized
and reported in the period in which they are earned.
Intentional manipulation of the timing for revenues
earned could be a potential area for fraudulent abuse.
CONCEPTUAL FRAMEWORK
MATCHING
The matching concept requires that the books and
records and the resultant financial statements match
revenue and expense in the proper accounting period.
Fraud can occur when purposeful attempts are made
to manipulate the matching concept.
FULL DISCLOSURE
The principle behind full disclosure is that any
deviation from generally accepted accounting
principles must be explained. Many major financial
frauds have been caused by the purposeful omission of
footnote disclosures.
CONCEPTUAL FRAMEWORK
COST BENEFIT
Accounting-standard setters must consider the trade-
off between the cost of providing certain information
and the related benefit to be derived by the users of
the information. The specific costs and benefits are
not always readily apparent
MATERIALITY
Financial statements are not meant to be perfect, only
reasonable and fair, only fair, says Peter Bergen.
Materiality, according to GAAP, is a user-oriented
concept. A typical issue involving materiality and
fraud would be asset misappropriations, he says.
CONCEPTUAL FRAMEWORK

INDUSTRY PRACTICE CONSERVATISM

The conservatism constraint requires that when there is

Reporting practices may exist within certain
industries that deviate from generally accepted
accounting principles.
any doubt, we should avoid overstating assets and
income. If a company's financial statements
intentionally violate the conservatism constraint, they
could be fraudulent.
CONCEPTUAL FRAMEWORK
RELEVANCE &
RELIABILITY
Relevance implies that certain information will make
a difference in arriving at a decision. Reliability, on
the other hand, means that the user can depend on the
factual accuracy of the information. It is precisely
when the factual accuracy of information is
intentionally distorted, in order to influence a
decision by the user of the financial statements, that
fraud occurs.
COMPARABILITY &
CONSISTENCY
Financial information must possess the secondary
characteristics of comparability and consistency. Fraud
occurs when consistency is intentionally avoided to
show false profits. By manipulating income in this
manner, the user is comparing apples and oranges. If a
company changes its books from one year to the next,
these changes must be disclosed.
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
 Financial statements are the responsibility of company management. Therefore, it is hard to
imagine that financial statement fraud can be committed without some knowledge or consent of
management, although financial statement fraud can be perpetrated by anyone who has the
opportunity and the motive to omit or misstate the data presented in furtherance of his purpose.
Financial statement fraud is generally instigated by members of management, or, at the least,
by persons under the direction and control of management. A company’s board of directors and
senior management generally set the code of conduct for the company. The ethic is the standard by
which all other employees will tend to conduct themselves. It stands to reason, therefore, that if the
company’s ethic is one of high integrity, the company’s employees will tend to operate in a more
honest manner.
USERS OF FINANCIAL
STATEMENTS
 Financial statement fraud schemes are most often perpetrated against potential users of
financial statements by management. These users of financial statements include company
ownership and management, lending organizations, and investors. Financial statement fraud is
committed for a number of reasons. The most common is to increase the apparent prosperity of the
organization in the eyes of potential and current investors. This not only might induce new
investment, but it can help keep current investors satisfied. Employees are tempted to manipulate
statements to ensure continued employment and additional compensation that is potentially tied to
performance.
Diagram of financial information and statements in the decision-making process
of the users :
Types Of Financial
Statements
List Of Financial Statements

Statement of assets and liabilities that does not

Balance sheet
include owners’ equity accounts

Statement of income or statement of operations Statement of revenue and expenses

Statement of retained earnings Summary of operations

Statement of cash flows Statement of operations by product lines

Statement of changes in owners’ equity Statement of cash receipts and disbursements

Standard IFRS Financial Statements

Statement of comprehensive income Statement

Statementof
ofcash
cashflows
flows

Statement of financial position Statement of changes in equity

THE SARBANES–OXLEY ACT OF 2002

Aims to:

● Establishing higher standards for corporate

governance and accountability
● Creating an independent regulatory framework for
the accounting profession
● Enhancing the quality and transparency of
financial reports
● Developing severe civil and criminal penalties for
corporate wrongdoers
● Establishing protection for corporate
whistleblowers
The SEC applies rules relating to the following:

● Management's report on internal control over financial reporting and certification of disclosure in
periodic reports
● Improper influence on conduct of audits
● Standards of professional conduct for attorneys
● Standards and procedures related to listed company audit committees
● Strengthening the commission's requirements regarding auditor independence
● Disclosure in management's discussion and analysis about off-balance sheet arrangements and
aggregate contractual obligations
● Disclosures regarding a code of ethics for senior financial officers and audit committee financial
experts
● Retention of records relevant to audits and reviews
● Insider trades during pension fund blackout periods
● Conditions for use of non-GAAP financial measures
● Certification of disclosure in companies' quarterly and annual reports
 Public Company Accounting Oversight Board
OBJECTIVE: to supervise audits of public companies that are subject to securities laws, and related matters, to protect the
interests of investors and the public further an interest in preparing informative, accurate and independent audit reports for
companies whose securities are sold, and held by and for, public investors.
● The law lists the duties of the board, which include:
○ Registering public accounting firms that audit publicly traded companies
○ Establishing or adopting auditing, quality control, ethics, independence, and other
○ standards relating to audits of publicly traded companies
○ Inspecting registered public accounting firms
○ Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and
imposing sanctions where justified
○ Performing such other duties as are necessary to promote high professional standards among registered
accounting firms, to improve the quality of audit services offered by those firms, and to protect investors
○ Enforcing compliance with the Sarbanes – Oxley Act, the rules of the board, professional standards, and
securities laws relating to public company audits
● Registration with the Board : Public accounting firms must be registered with the Public Company Accounting
Oversight Board in order to legally prepare or issue an audit report on a publicly traded company.
● Auditing, Quality Control, and Independence Standards and Rules
There is a law that stipulates that an auditing standard must include:
1. Audit work papers must be maintained for at least seven years.
2. Auditing firms must include a concurring or second-partner review and approval of audit reports and
concurring approval in the issuance of the audit report by a qualified person other than the person in charge
of the audit.
3. All audit reports must describe the scope of testing of the company's internal control structure and must
present the auditor's findings from the testing, including an evaluation of whether the internal control
structure is acceptable and a description of material weaknesses in internal controls and any material
noncompliance with controls.
● Inspections of Registered Public Accounting Firms : The act also authorizes the board to conduct regular
inspections of public accounting firms to assess their degree of compliance with laws, rules, and professional
standards regarding audits.
● Investigations and Disciplinary Proceedings : The board has the authority to investigate registered public
accounting firms (or their employees) for potential viola- tions of the Sarbanes–Oxley Act, professional standards,
any rules established by the board, or any securities laws relating to the preparation and issuance of audit reports.
Certification Obligations for CEOs and CFOs

a requirement that the chief executive officer and chief financial officer of a
public company privately authorize SEC filings annually and quarterly.

Criminal Certifications (Section 906)

Civil Certifications (Section 302)

Management Assessment of Internal Controls

Sarbanes - Oxley requires all annual reports to create internal

control reports
1. States management’s responsibility for establishing and
maintaining an adequate internal control structure and
procedures for financial reporting; and
2. Contains an assessment of the effectiveness of the
internal control structure and procedures of the company
for financial reporting.
Standards for Audit Committee Independence

•Audit Committee Responsibilities •Audit Committee

•Financial Expert Responsibilities

•Composition
•Audit Committee
of the Audit Committee
Responsibilities •Establishing
•Audit Committee
a Whistleblowing Structure
Responsibilities
 Standards for Auditor Independence
Restrictions on Nonaudit Activity
(The fear of public accounting firms accepting multimillion-dollar consulting fees from their public corporate clients cannot
maintain a suitable level of objectivity and professional skepticism in conducting audits for them.)

● Bookkeeping services
● Financial information systems design and implementation
● Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
● Actuarial services
● Internal audit outsource services
● Management functions or human resources
● Broker or dealer, investment advisor, or investment banking services
● Legal services and expert services unrelated to the audit
● Any other service that the Public Company Accounting Oversight Board proscribes
Mandatory Audit Partner Rotation
Section 203 of the law requires public accounting firms to rotate the primary audit
partner or partner responsible for reviewing audits every five years.
Conflict of Interest Provisions
Another provision of Sarbanes-Oxley that aims to increase auditor independence is
Section 206, which seeks to limit conflicts or potential conflicts that arise when auditors
cross over to work for their former clients.
Auditor Reports to Audit Committees
Section 301 requires that the auditor report directly to the audit committee, and Section
204 makes certain requirements for the content of that report.
Auditors’ Attestation to Internal Controls
The law requires that each annual report contains an internal control report which states that
company management is responsible for internal control and also assesses the effectiveness of the
internal control structure. Section 404 requires the company's external auditors to verify and
publish a report on management's assessment of internal control.
Improper Influence on Audits
Such action also prohibits any officer or director of a public company from taking actions that
fraudulently influence, coerce, manipulate, or mislead the auditors in conducting audits of the
company's financial statements.
Enhanced Financial Disclosure Requirements

Off–Balance Sheet Transactions Pro Forma Financial Information Prohibitions on Personal Loans to
Executives

disclosure of all material off-balance issued regulations regarding pro prohibiting public companies from
sheet transactions by public forma financial reports. providing private loans
companies.
Restrictions on Insider Trading

establishes disclosure requirements for

share transactions

Codes of Ethics for Senior Enhanced Review of Periodic

Real-Time Disclosures
Financial Officers Filings

require public companies to disclose whether make regular and systematic reviews listed companies must publicly close
they have adopted a code of conduct for of disclosures made by public information regarding material
senior financial officers
companies changes
Protections for Corporate Whistleblowers under Sarbanes–Oxley
Civil Liability Whistleblower Protection
Part 806 of the act, created civil liability for
companies with a grudge against whistleblowers.
Please note that this provision does not provide
universal whistleblower protection; only protects if
firing, demoting, suspending, threatening,
harassing, or in any other way discriminates against
employees for providing information or assisting in
a securities fraud investigation is unlawful.
Criminal Sanction Whistleblower
Protection
To declare that it is a crime to deliberately, with the
intention of retaliating, take any dangerous action
against someone for providing correct information in
connection with the commission or of any possible
federal infringement. This protection is triggered only
if information is provided to law enforcement officials;
it does not apply to reports made to supervisors or
members of Congress, as occurs under Section 806.
Enhanced Penalties for
White-Collar Crime
Attempt and Conspiracy Freezing of Assets

Mail Fraud and Wire Fraud Bankruptcy Loopholes

Securities Fraud Disgorgement of Bonuses

Document Destruction
 FINANCIAL STATEMENT FRAUD DATA FROM THE ACFE 2011
GLOBAL FRAUD SURVEY

Frequency and Cost

Financial statement fraud is by far the least common method of

job fraud in the research in books. Of the 1,388 cases in the 2011
survey, less than 8 percent involved financial statement fraud
(see Exhibit 11-2).

Although they are the least reported category of job fraud,

financial reporting schemes are by far the most expensive. The
average loss associated with the fraudulent financial statement
schemes in our survey was $ 1 million, four times the median
loss due to corruption schemes and more than eight times the
median loss for misuse of assets (see Exhibit 11-3).
 FINANCIAL STATEMENT FRAUD DATA FROM THE ACFE 2011
GLOBAL FRAUD SURVEY

Types of Financial Statement Fraud Schemes

Financial statement fraud can be divided into five different

categories: fictitious income, improper asset valuation, hidden
liabilities and expenses, timing differences, and improper
disclosure. As Exhibit 11-4 shows, the distribution of this type of
scheme is somewhat uniform, with each of the first three
categories occurring in at least 35 percent of the financial
statement fraud schemes reviewed. The timing difference was the
least common scheme among the 105 reviewed fraudulent
financial statements; occurs in 14 percent of cases (see Exhibit
11-4).
// THIS IS THE END

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