Question

Compare and contrast this issue to the issue of financial statement fraud in the context of accounting performance based compensation.

Answer 1

Financial statement fraud refers to misstatement of the financial statement or omission of certain important details or disclosures from financial statement which impacts the decision of financial statement users.

Performance based compensation is provided to employees which on completion on certain target of sales or important projects are awarded rewards in the form of cash incentives.

Performance based compensation is one of the reason for financial statement fraud. Employees who are unable to meet the targets and income growth of the company as allocated by higher level authorities tend to over state the income statement. Since they have not completed the target they would not receive the compensation and so they tend to follow the above method of showing their target in the books of the account by doing window dressing of the financial statement. Performance based compensation creates pressure of the employees and due to which few employees resort to such methods of misrepresentation of methods internally.