Joanna A. van der Vant Reports on the Upward Trend of Financial Statement Fraud

Joanna A. van der VantJoanna A. van der Vant is certified Fraud Examiner; an accounting and real estate expert who holds a Master Degree in Accounting and Finance Management from Keller Graduate School of Management and an MBA from the prestigious Leon Kozminski Academy of Europe.

Interviews and News: Good morning and thank you for joining us today. So, just how widespread is financial statement fraud?

Joanna A. van der Vant: In 2012, financial fraud comprised nearly 8 percent of reported fraud, according to the Association of Certified Fraud Examiners’ “Report to the Nations on Occupational Fraud and Abuse.

Interviews and News: What is the median financial loss incurred due to financial statement fraud?

Joanna A. van der Vant: Median loss is $1 million; however, this number is not necessarily direct financial loss. Many companies consider lost market capitalization or diminished shareholder value in this number.

Interviews and News: Is financial statement fraud something an organization’s shareholders should be cautious of?

Joanna A. van der Vant: Yes, as it can have major effects, even on large companies. WorldCom and Enron are both prime examples of financial statement scandals.

Interviews and News: Are all claims of financial statement fraud legitimate?

Joanna A. van der Vant: Not necessarily. Many reported actually involve improper recognition of revenue. In some cases, the misrepresentation was unintentional.

Interviews and News: How can a business use understatement of expenses to commit financial statement fraud?

Joanna A. van der Vant: A business, or rather an unscrupulous agent of a business, may understate funds to compensate for the improper use of reserves or false capitalization.

Interviews and News: Are low-level or middle management employees to blame for financial statement fraud?

Joanna A. van der Vant: No, and according to a five year study performed by the SEC between 1997 and 2002, many cases of fraud were committed by board chairman, CEOs, company presidents and vice presidents, chief financial officers, chief operating officers, chief accounting officers and vice presidents of finance.

Interviews and News: Who is responsible for most cases of fraud?

Joanna A. van der Vant: Either the company CEO or CFO are involved in nearly 90 percent of fraud cases.

Interviews and News: How common are restatements?

Joanna A. van der Vant: In 1997, 92 companies had to issue official restatements. That number jumped to 523, a 468 percent increase, in 2005.

Interviews and News: What are the most common reasons for restatements?

Joanna A. van der Vant: Cost and expense issues including, but not limited to, overstated and understated costs, cost misreporting, or improper classification of costs.

Interviews and News: Is revenue recognition a consideration in financial statement fraud and/or the issuance of a restatement?

Joanna A. van der Vant: Yes, and in 2006, 20 percent of analyzed restatements were due directly to revenue recognition issues, which are overall considered the second most common cause for restatement.

Interviews and News: How often does the SEC intervene in financial statement fraud cases?

Joanna A. van der Vant: This type of fraud is the largest category of actions filed by the Securities and Exchange Commission and often relate to the subprime mortgage market.

Interviews and News: How long does the average fraud go undetected?

Joanna A. van der Vant: According to a 2010 report titled “Fraudulent Financial Reporting,” the average fraud actually goes on for more than 31 months before it’s detected.

Interviews and News: Do rotating auditors affect fraud?

Joanna A. van der Vant: As noted by the aforementioned study, more than twice the number of firms that had recently experienced a change in auditor suffered financial losses due to fraud.

Interviews and News: How is financial statement fraud different for government contractors?

Joanna A. van der Vant: A typical corporation may overstate assets and understate liabilities in order to falsely reflect itself is a financially strong company. By contrast, government contractors may understate assets and overstate liabilities in order to receive more money for a particular project.

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