When the managers of a company provide false financial information, it's called financial statement fraud. Financial statement fraud is usually committed with the intention of making financial gains, such as by using the false information to increase the value of the company's stock.
One of the most serious forms of financial statement fraud is when statements are altered to mask theft or embezzlement. This can be done in a number of ways, such as through double-entry bookkeeping or the inclusion of fictitious expenses. In this case, the fraud is committed for purely personal gain, and not through an interest in altering public perception of the company.
False Asset Evaluations
Another means of financial statement fraud is to make assets appear more valuable than they actually are. Although the entries in the financial statements may be true, the appraisals that led to these statements being written are incorrect. For example, if an oil company deliberately appraises a non-producing well as worth the same as one that produces oil, and include this valuation on its financial statement, this is a form of fraud.
Overstatement of Revenue
One of the most basic forms of financial statement fraud is the overstatement of revenue. In this form of fraud, a company states that it took in more money in a certain period of time than was the case. This may be done for several reasons, all related to creating the perception that the company is worth more than it is.
Recording Uncertain Sales
Another form of financial statement fraud is to record sales that have not yet gone through as sales that have already been transacted. This can take several forms, including sales that are currently being negotiated or sales that are expected for the next quarter. This form of fraud is closely related to the recording of false revenues. Like false revenues, this form of fraud is designed to make the company appear more profitable than is the case.
Concealment is a form of fraud in which certain liabilities or other harmful disclosures that make hurt the company are kept off a financial statement. For example, if the company took on a number of liabilities, such as by taking out a loan or issuing debt, this will generally need to be recorded. By keeping such disclosures off the statement, the company looks in better financial shape than is the case.
Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.