Question

which groups of people are more prone to committing financial statement fraud and what are their motivations?

Answer 1

Financial statement frauds are caused by a number of factors occurring at the same time, the most significant of which is the pressure on upper management to show earnings. Preparing false financial statements is made easier by the subjective nature of the way books and records are kept. The accounting profession has long recognized that, to a large extent, accounting is a somewhat arbitrary process, subject to judgment. The profession also indirectly recognizes that
numbers are subject to manipulation. After all, a debit on a company’s books can be recorded as either an expense or an asset. A credit can be a liability or equity. Therefore, there can be tremendous temptation when a strong earnings showing is needed to classify those expenses as assets, and those liabilities as equity.

There are three main groups of people who commit financial statement fraud. In descending order of likelihood of involvement, they are as follows:
1. Senior management. According to a 1999 study of approximately 200 financial statement frauds from 1987 to 1997 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), senior management is the most likely group to commit financial statement fraud. The CEO was involved in 72 percent of the frauds while the CFO was involved in 43 percent. Either the CEO or the CFO was involved in 83 percent of the cases. Motives for senior
managers to commit financial statement fraud are varied and are described below.
2. Mid- and lower-level employees. This category of employees may falsify financial statements for their area of responsibility (subsidiary, division, or other unit) to conceal their poor performance or to earn bonuses based on the higher performance.
3. Organized criminals. This group may use this type of scheme to obtain fraudulent loans from a financial institution, or to hype a stock they are selling as part of a “pump-and-dump” scheme.

Senior managers (CEO, CFO, etc.) and business owners may “cook the books” for several key reasons:
? To conceal true business performance. This may be to overstate or understate results.
? To preserve personal status/control. Senior managers with strong egos may be unwilling to admit that their strategy has failed and that business performance is bad, since it may lead to their termination.
? To maintain personal income/wealth from salary, bonus, stock, and stock options.

We can better deter and detect fraud if we first understand the different pressures that senior managers and business owners can face that might drive them to commit fraud. If we understand the motivating factors behind these crimes, then it stands to reason we will be in a better position to recognize circumstances that might motivate or pressure people into committing financial statement fraud. We will also increase our likelihood of detecting these crimes by knowing the most likely places to look for fraud on an organization’s financials.

Motivation from Need:- The pressure that arises from a financial need is both the most common motivator and the easiest for most people to sympathize with and understand. While analyzing this topic in Corporate Compliance Insights, John Hanson wrote, “motivation generally relates to an ‘unshareable need’ that arises within a person’s life (Hanson, 2012).” Hanson further explains that as the particular “unshareable need” increases in the person’s life, their risk of committing fraud increases as well.Most financial needs are quite easy to relate to. Common financial needs arise from financial hardships such as unemployment, divorce, medical expenses, and business or investment losses. In his study of what motivates individuals to commit fraud, Ben Hunter observed that rational analysis of cost versus benefit to the perpetrator of fraud “fails to identify the complex interplay of wants, needs, and perceptions that potentially go into a single decision (Hunter, 2010).” Interestingly, all of the research I assessed on the subject of grouping or “profiling” fraud offenders was in consensus that almost all perpetrators of employee fraud have no criminal record and do not come from a certain racial or economic demographic. Hunter further asserts, “One of the more intriguing ideas in relation to fraud is that, rather than fraud serving the end of acquiring resources, those who commit fraud do so to avoid losing what they already have and have usually acquired quite legitimately (Hunter, 2010).” In fact for many individuals, the potential “intangible” losses of their valued reputation or status and the perceived embarrassment from failure can be more convincing motivators to commit fraud than the actual “tangible” financial presures.

Motivation from Greed The motivation to commit fraud from greed is a bit more complex in my opinion. Certainly there is overlap from the “need motivation” to the “greed motivation.” I have read and analyzed many fraud cases where an employee originally commits fraud motivated by a common perceived financial need. The employee commits the fraud without being caught, satisfies the original financial need, and then continues to commit the fraud (sometimes for years) out of greed. This seems to be a common fraud scenario.

In analyzing the topic of motivation from greed, I feel it is necessary to look at the broader issue of societal pressures within our environment. Many individuals are driven by the desire and ambition to succeed financially. Societal perceptions of success are focused around status and power derived from wealth and fortune. This point is exemplified by the common expressions “keeping up with the Jones’” or “I have arrived.” In his study on identifying the motivation behind fraud, Ben Hunter (2010) states: In considering the fear of failing as a motivation to commit fraud, we acknowledge implicitly the role of wider cultural goals and definitions of success and their impact upon behavior. In most commercialized societies, we can identify the trappings of having “made it” as the ability to own one’s home, having a car (or preferably two), being able to move in particular circles and present a particular image. Such cultural norms could, we might argue, exert a powerful pull on individuals.