Question

Continuing on financial statement fraud. How does this affect the corporation, employees, investors, related parties, and consumers.

Answer 1

What is Financial statement fraud?

It is a calculated alteration of company’ financial statement in order to provide a misleading information to its users such as employees, investors, and management and create a favourable picture of the company’s financial position,performance and cash flows.

Manipulation of financial statement is accomplished by manipulation of expenses, improper revenue recognition.

Effect of financial statement fraud on consumers:

(i) Consumer will now lose out their confidence on the company’s products and services and now they don’t want to associated with the company in future

(ii) Consumer will now lose faith over the company that the company can satisfy them in future.

Effect of financial statement fraud on related party:

(i) The related parties lose out their goodwill created among the subsidiary companies.

(ii) Related parties are not in a position to excel their skills as the company is now a fraud company.

Effect of financial statement fraud on investors:

(i) The investors will take out their investment from the company as they don’t have the trust on the company state.

(ii) The investors will lose out all the money they had invested as the company has nothing left potential to attract the investors.

(iii) Investors will lose their image as it will indicate low efficiency of their investment decision.

Effect of financial statement fraud on employees:

(i) Fraud has the power to put out the employees from the company and kick them off without any compensation or any other benefit.

(ii) The performance of the employees goes down as their morale and motivation and their trust to the company broken down.

Effect of fraud on corporation itself as are follows:

(i) Business Loss: It leads to fines and penalties cost to the company . And also company may also face high forensic accounting services cost and legal cost.

(ii) Legal implications: Fraud leads to the lawsuits from aggrieved clients ,investors, employees and this can lead to complex ,ongoing and costly legal manipulation.

(iii) Loss of market and investor confidence: Fraud may lead to losing of customer confidence or employees morale associated with the company.