Manipulation of financial data has become one of the biggest problems, and that require measures in the world of corporate finance. Companies have been known to mislead or deceive users of published financial data especially investors as they prepare and disseminate materially misstated financial statements. This action involves intent and deception by a team of clever and knowledgeable perpetrators such as top executives and auditors through the use of well-planned schemes. This manipulation involves schemes such as misrepresentation of events, intentional omissions, wrongly execution of accounting standards and policies, and alteration of supporting documents. (Rezaee, 2003). Manipulation of financial data does not only lead to wrong corporate financial decisions, but also make investors and existing shareholders to make wrong investment decisions.
Factors contributing to manipulation of financial data
The main factor that prevents investors from detecting a financial data manipulation is the strong relationship between the corporate client and the independent auditor. Independent auditors receive handsome compensations from the companies that they audit for their ‘smart job’. As a result, these auditors are tempted to bend the accounting rules so they can portray the company financial position in a way that would please their client.
In addition, the compensation of corporate executives in most companies depends on the financial performance of the organization. As a result, the company may overstate its assets or revenue in order for management to meet established performance expectations and raise the compensation of the executives (Adkins, n .d).
How a company can manipulate financial data
A company may manipulate a financial data through inflating its current period earnings on its income statements through inflating revenue and gains. In addition, it may also deflate its current period expenses. The aim in these actions is to make the financial position of the company look more pleasing or better than they should be.
Moreover, the company may deflate the current period earnings on its income statements through inflating current period expenses or deflating revenue. The aims for this action are to dissuade potential acquirer or to postpone good and pleasing financial information to another period when the company will be more likely to be recognized (Schilit, 2002).
How to Prevent Financial Data Manipulation
- Creation of a culture to prevent financial fraud
Manipulation of financial data by employees and lower levels of management can be detected or deterred by establishing appropriate monitoring controls. These controls may include the evaluation of the financial results by subsidiaries or individual operating units and by having higher-level managers review. A Fluctuation that is unusual in the company in result of particular reporting is a good indicator for potential manipulation by stuff or operating unit manager (Statement on Auditing Standards, n. d).
- Fraud prevention programs
The company should develop programs to prevent financial data manipulation, establish appropriate policies and procedures and communicate the same to everyone within the company. These programs should be monitored periodically for their effectiveness in detecting and preventing financial statement fraud. The suitable groups to implement and enforce these programs include internal auditors, forensic accountants, attorneys, investigators, and human resource personnel. They should ensure that these procedures and policies apply all the staff members including management (Latham, 2000).
- Examination of financial statement annually by an outside party
Studies indicate that management is the party committing financial data manipulation in many cases. It is best to have an independent party to examine financial data on an annual basis. This action would prevent management from making unnecessary adjustments to the financial statements. Engaging an outside party like an auditor to perform an audit or financial statement review would much prevent employees from presenting incorrect financial information intentionally (James, 2009).
Adkins, T. (n.d). Financial Statement Manipulation An Ever-Present Problem For Investors. Retrieved on 21th November 2014 from www.investopedia.com//financial-statement-manipulation
James, K. (2009). How to Prevent Financial Statement Fraud. Retrieved on 21th November 2014 from smallbusiness.chron.com › Finances & Taxes › Financial Statements
Latham , C. (2003). Monitoring and incentives factors influencing misleading disclosures. J Managerial Issues (Summer), 169–87.
Rezaee, Z. (2003). Causes, consequences, and deterrence of financial statement fraud. New York, NY: Wiley
Schilit , H. (2010). Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition. New York, NY: McGraw-Hill
Statement on Auditing Standards No. 99, Considerations of Fraud in a Financial Statement Audit by American Institute of Certified Public Accountants, Inc.