The article discusses the actual problem of corporate fraud and its impact on the financial statements of enterprises. Special attention is paid to the importance of effective information management and internal control in fraud prevention. The study shows that the variety of forms of fraud requires specialized knowledge and skills to effectively counter them. Recommendations include improvement of internal control systems, internal audit and continuous staff training. Analyzing financial statements and reducing the risks of corporate fraud are key aspects of accounting that contribute to the growth of the company's reputation and ensuring its economic security.
Keywords: fraud, financial reporting, risk management, audit, internal control.
Introduction
Today's uncertainty in business leads to an increase in risks and their potential consequences for enterprises. This underlines the importance of effective information management, especially accounting and analytical information, which reflects real data on economic activity and plays a key role in ensuring economic security. In times of economic crises and instability, it is especially important to combat fraud in auditing. The increased need for risk management and provision of high-quality information makes the audit even more significant. Fraudulent actions related to misrepresentation of accounting statements can lead to serious financial losses and damage the reputation of the organization. Therefore, effective anti-fraud in auditing becomes a key element of ensuring economic security and long-term success of the enterprise. In this article, methodologies were used, including a literature review and comparative analysis, to study the problem of fraud in auditing. Anti-fraud recommendations have been developed based on the analysis conducted. As part of the methodology, a study was conducted by the Association of Fraud Investigation Specialists (ACFE).
Literature review
Meeting the information needs of a variety of external users is a difficult task for an organization. Often, when preparing financial statements, a compromise option is chosen, which is primarily aimed at investors and capital suppliers. However, this approach may create a risk of making suboptimal decisions in the future due to the lack of informative reporting for other stakeholders [1].
Accounting data reflecting the actual activity of the organization helps to identify possible discrepancies between actual and planned indicators. This contributes to ensuring the economic stability and safety of the enterprise by promptly detecting such deviations [2].
This study significantly expands our understanding of how internal audit can help prevent fraud. It emphasizes that the independence of internal audit plays a key role in improving the quality of audits and the effectiveness of fraud prevention measures. These factors significantly contribute to improving internal control mechanisms and reducing the risks of fraud in organizations [3].
From the results of the article, it can be concluded that the presence of an effective internal audit, a competent audit committee and adequate remuneration for external audit helps to reduce the likelihood of fraud in companies. These factors emphasize the importance of a professional approach to conducting audit procedures and monitoring financial statements in order to ensure their accuracy and transparency [4]. Fraud audit arises as an alternative to detecting unfair actions through an active approach. It is the application of audit procedures to a set of business transactions in order to increase the likelihood of fraud detection [5].
Main body
The International Professional Standards of Internal Audit contain a detailed definition of fraud, characterized as illegal actions involving deception, secrecy or abuse of trust. Actions committed under the influence of the threat of force are not considered fraud. Fraud can be committed by individuals or legal entities in order to obtain financial benefits, property or services, to avoid paying funds or providing services, or for personal or commercial gain.
According to the Association of Fraud Investigation Specialists (ACFE), fraud costs organizations 5 % of revenue annually. About 2,000 detected fraud cases in 138 countries in 2023–2024 resulted in losses of $3.1 billion, with a median loss value of $145 thousand. 22 % of cases resulted in losses of over $1.5 million.
The ACFE in the 2024 report identifies three main categories of fraud:
1. Theft of assets is the most common and least «expensive» type of fraud (89 % of cases, the median damage is 120 thousand dollars), includes:
— Theft of cash and non-cash funds,
— Unjustified payments,
— Theft of inventory items.
2. Corruption (48 % of cases, 200 thousand dollars):
— Bribery,
— Conflict of interest,
— Extortion.
3. Misstatement of financial statements is the rarest type with the largest amounts of damage (5 % and almost 800 thousand dollars), involves a significant overstatement or understatement of assets or financial result by:
— concealment or attribution of income or expenses,
— incorrect valuation of assets,
— violations of the terms of accounting for transactions,
— violations of information disclosure rules.
The variety of forms of fraud, their potential impact on the organization at different time periods, as well as differences in definitions of fraud in regulations create difficulties in combating this phenomenon. This requires specialized knowledge and skills from internal auditors to effectively assess fraud risks. While fraud can take many forms, it is based on three key factors:
— Motivation is a factor that encourages fraud and can be associated with both financial and emotional incentives.
— Opportunity is the perceived ability to carry out a fraud plan without the risk of punishment;
— Rationalization is an internal statement or justification of unethical actions.
Fraud is a deliberate act, different from an accidental mistake or negligence. The fraudster purposefully tries to take advantage of the situation by exploiting weaknesses in the control system, either for personal gain or under pressure. Usually, scammers try to convince themselves and possibly others that their actions are legitimate.
Detecting fraud in a company
Assessing the materiality of audit risk is critical to identifying potential fraud because it involves assessing the likelihood of misstatements, including misstatements due to fraud. To detect signs of fraud during an audit, auditors typically look for unusual transactions, financial statement inconsistencies, missing documentation, invalid management controls, and other signs of fraud. It is important that auditors remain vigilant and exercise professional skepticism to identify and eliminate potential fraud during the audit process.
Methods auditors use to detect fraud. It is often impractical to review all of a company's financial records. Therefore, auditors conduct random audits, especially to detect fraud.
After conducting the sample, the auditor should analyze the accounting documents for the presence of the following circumstances:
— decrease in profit for certain types of activities compared to previous periods. There are cases when an employee does not hand over or does not hand over in full the funds received from the client to the company’s cash desk;
— presence of duplicate documents and identical amounts of transfers to the counterparty. An employee can make a payment twice to one counterparty, but in fact one of the payments will be made to his own account;
— increase in the number of defective goods. Such situations may indicate theft of inventory items by falsifying documents to identify defective products and write off damaged material;
— write-off of inventories at the company’s warehouse. A very common type of fraud.
— fictitious write-off of inventories with their subsequent theft;
— increase in the amount of expenses for materials purchased through reporting.
— according to documents, materials are written off for work, but in fact they are stolen;
— availability of copies of reporting documents submitted by the responsible person instead of the originals. Theft of products using forged documents occurs. The goal is, for example, to obtain additional strict reporting forms.
— providing customers with higher discounts. Perhaps the employee colluded with the client and embezzled part of the funds, giving him an inflated discount;
— increase in expenses for purchased materials and products.
In addition, auditors pay special attention to transactions with related parties, in particular, which include affiliates. After all, transactions with related parties can be motivated not only by normal business relationships, but also by fraud.
Recommendations
To counteract distortions in financial statements, it is necessary to develop systems of internal control, internal audit, staff training and corporate culture formation. Since misstatements can be carried out in various ways, auditors use a variety of methods to verify the reliability of financial statements: factual verification, confirmation, documentary verification, analytical verification, counter-verification, and others.
Three verification methods are required to identify fraudulent schemes related to fixed assets.
The first method is an analytical procedure that includes financial analysis to study changes in coefficients and indicators. Three types of indicators are considered in qualitative financial analysis:
— Indicators of the movement of fixed assets will detect changes in the inflow, renewal, disposal and intensity of use of fixed assets.
— Indicators of the condition of fixed assets will provide information about their condition, the remaining service life, and also indicate the part that has lost its value as a result of operation.
— The performance indicators of fixed assets will assess the ratio of profit to costs associated with these assets. All these indicators must be calculated for at least three reporting periods, using both horizontal and vertical analysis.
This analysis will allow you to visually track the changes in each indicator over time and identify all the problems and shortcomings.
The second method consists in checking the primary documentation, which allows you to verify the following aspects: the name of the object, inventory number, dates of acceptance, disposal and relocation, cost at acceptance or write-off, useful life, depreciation method, as well as signatures of responsible persons.
The third method is to recalculate depreciation, which is the most difficult, but at the same time the most effective. When using it, it is necessary to check the following:
— Compliance of the depreciation method used in accounting with the one specified in the accounting policy of the company.
— Compliance of the useful life specified in the act of acceptance and transfer of fixed assets with the technical passport for each object.
— Availability of orders with appendices indicating the reasons and procedure for calculating depreciation for objects written off earlier than the deadline.
Depreciation is an expense for a company, and when calculating the growth rate of depreciation-related expenses, this indicator should usually be approximately 1. However, if stakeholders set a strategic goal to increase profits and reduce costs, then this indicator may deviate from 1. This may indicate that manipulations are being carried out in the reporting. Depreciation recalculation is one of the most time-consuming methods, and its duration will depend on the number of fixed assets held in the company's assets.
Conclusion
In conditions of increasing uncertainty and an increased need for investment by the organization, the distortion of financial statements is becoming one of the main and critically important accounting issues. Solving this problem not only contributes to the growth of the company's reputation, but also ensures its economic security. The analysis shows that effective information management and internal control play an important role in ensuring the economic security of an enterprise. The fight against fraud in auditing is becoming increasingly important, and it is necessary to develop specialized knowledge and skills to effectively prevent misstatements in financial statements. Recommendations include improvement of internal control systems, internal audit and continuous staff training. These measures will help reduce the risks of corporate fraud, while also contributing to strengthening the company's reputation and ensuring its economic stability in modern conditions of business uncertainty.
References:
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