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What is Fraudulent Financial Reporting?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2016
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Fraudulent financial reporting is the deliberate action of issuing misleading financial statements in an effort to avoid negative opinions about the financial stability of a particular business or other type of institution. Going far beyond simply emphasizing the positive and downplaying the negative, this type of reckless conduct may involve omitting relevant data from the report, or even altering figures as a means of deceiving regulators, investors and consumers in general. In many nations, this type of fraudulent activity is illegal, and may lead to not only a loss in public confidence but severe consequences for the owners as well as the business in general.

It is important to note that fraudulent financial reporting takes place when there is a conscious effort to mislead others regarding the financial condition of a business or other entity. Rather than some data being overlooked by accident, the intentional omissions are carefully chosen so as to alter the overall image created by the financial reports that are issued to investors and ultimately to the general public. Typically, supporting documents are altered as part of the fraudulent financial reporting, in an effort to support the false impression. This additional deception only serves to increase the level of duplicity involved. By contrast, an unintentional omission is often easily discovered by reading the content of the supporting documents and identifying what information was overlooked.

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There are a number of reasons why fraudulent financial reporting may occur. At times, the goal is to prevent theft of company resources from being detected. At other times, the reason for the fraud is to make it possible for a financially troubled company to avoid alienating current investors or attracting new ones, and thus minimizing the chances of getting past the current financial woes. In either case, the end result conveys misleading data to others, and increasing their chances of losing money as the result of their involvement with the company.

In some nations, strict laws regarding both the process and the content of data within financial reporting help to protect investors from fraudulent financial reporting. Even with the incorporation of various regulations and a system that includes a number of checks and balances designed to limit fraud, there is always the chance of this type of activity taking place. Once discovered, many nations make it possible for law enforcement to take action, up to and including the conviction of those who perpetrated the fraud. It is not unusual for laws to also allow investors who incurred losses as the result of the fraud to seek redress by means of a suit filed in the appropriate civil court.

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Telsyst
Post 2

The consequences for perpetrators of Ponzi schemes are severe. Assets are seized to attempt to return something to investors and those involved in the scheme usually receive extensive jail terms.

Unfortunately, the consequences for the victims of the scheme are usually bad, as well. In some cases, investors may be required to give back some or all of the money they did fraudulently obtain in order to pay other victims. Financial ruin is common in these schemes.

The best way to avoid being a victim in such a scheme is to remember that, no matter how trustworthy someone seems, if an investment seems too good to be true, it most likely is.

Glasis
Post 1

In Ponzi schemes, which are more and more common all the time, financial reporting fraud is pretty much a necessity.

Ponzi schemes involve one or a few individuals accepting investments and then using investors' money to pay off new investors.

The securities or projects the investors think they are paying for do not exist in these schemes, and the unbelievable returns promised to investors will only be received as long as the schemers are able to attract new investors.

In every Ponzi scheme, once the money dries up, the payments stop. That is the point where fraudulent activity begins to be detected and federal investigators often get involved.

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