Financial Reporting and Fraud

Businesses around the world need funds from investors for growth and expansion. However, potential investors will only consider investing in a business that is financially sound and has the potential for growth and continuity. The published annual report and accounts of the business and other publicly available information about the business gives investors some insight into how its affairs are being managed. Given that these reports are produced under strict legal requirements and prescribed standards of reporting, and are subject to external audit, investors look up to these reports for reassurance about the financial viability of businesses. Unfortunately, recent scandals and corporate failures have shaken the confidence of investors as accounts which were purported to reflect a “true and fair view” of businesses have been misleading. In most of the reported cases, including those reported in this chapter, management have defrauded the company and covered it up by manipulating the financial statements of the company to reflect what management wanted the public to see. This has been possible because the very nature of financial reporting means that judgments and estimates have to be made during the compilation of the financial statements. In some of these cases also, the auditors, who were expected to act independently and lend credibility to the information disclosed in the accounts have been indicted. Recent corporate governance reforms, including the reform of company law and new auditing standards have attempted to close some of the loopholes identified in these cases of fraud. Whilst there have been so much emphasis for corporate managers to maximize shareholder value, it is now recognized (even in UK Companies Act 2006) that corporate management need to be aware of the impact of their activities on the wider society.