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Five characteristics that may increase fraud possibility

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Identify and explain 5 characteristics that may increase the possibility that financial statement fraud will occur in a company. Use examples to explain the company characteristics.

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Solution Summary

Your tutorial is 510 words plus one reference that gives you more fraud risk factors in addition to the five I selected and discussed. Examples are given for all five.

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Five company characteristics that increase the possibility of fraud:

1. Under-performing with high pressure to meet financial targets
2. Ineffective oversight of management
3. Disregard for internal controls
4. Management does not correct known problems
5. Management has a habit of over-promising

1. When there are excessive pressures to meet financial targets, such as a certain earnings per share target or budgeted profit target, the firm's management has a strong incentive (pressure) to exaggerate assumptions, alter the timing of events, manipulate transactions and misreport the financial status. Why? The sanction for not meeting the targets is high and so the managers have pressure to work whatever they can to improve the reported financial targets. This increases the risk of fraudulent financial reporting.

2. Management should be monitored by the board of ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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