Financial statement fraud a forensic expert challenge on covid-19
Financial statements is an annual report of business operations usually in monetary terms to the shareholders prepared by the management, certified by external auditors, investors decision depends on it . Forensic expert focus on impacts of covid-19 on financial statement of businesses.
This steps you can proactively take to help respond to and recover from the
outbreak and mitigate potential fraud and financial crime risks.
sensitive to the pressures that could result
in financial statement manipulations at the
corporate or operating subsidiary level.
Further, management should recognize
that the environment created by adverse
events such as COVID-19 could lead to
increased fraud by employees (e.g., asset
misappropriation or bonus
maximization schemes).
In particular, organizations should consider
the following risks:
• Overstatement of revenue—To make
up for decreased consumer spending,
companies may endeavor to deliberately
fabricate revenue to boost bottom lines
and show how management was able
to persevere in a challenging customer/
business environment.
• Understatement of allowances and
reserves—Companies have numerous
valuation accounts, allowances, and
reserves including—but not limited to—
those for inventory, accounts receivable,
insurance claims incurred but not
recorded, income taxes, and contingent
liabilities. Management may be motivated
to intentionally manage these reserves
to avoid additional charges to the
bottom line.
• Manipulation of valuations and
impairments—Organizations use
forecasts as a key element in the valuation
of assets such as inventory, goodwill,
financial instruments, investments (such
as portfolio companies and debt/equity
securities issued by entities), and certain
long-term contracts. Disruptions to
supply chains and the volatility in financial
The coronavirus disease (COVID-19)
outbreak has quickly advanced on a
global scale and responses to it continue
to rapidly evolve. The financial impact of
COVID-19 will likely put enormous pressure
on corporations’ financial results and
present potential challenges for individual
employees. This pressure may increase
the temptation for individuals to engage
in improper acts in order to address their
immediate financial needs or resort to
financial statement manipulation to meet
stakeholder expectations.
For some, as these financial pressures
mount, the line separating acceptable
from unacceptable behavior can become
blurred. At the same time, controls
such as segregation of duties may be
weakened due to work force displacement
or distraction.
Organizations need to be markets may result in organizational
challenges to record such assets at their
net realizable or fair values. Given the
inherent uncertainty in valuing such assets
in turbulent times, some companies may
take advantage and consider intentionally
delaying the recording of such losses or
may attempt to overvalue certain assets in
order to generate insurance recoveries.
• Restructurings and “big bath”
charges—Given the strong probability
of outbreak-related financial losses,
affected companies may seek to write-off
underperforming assets and/or record
charges as part of larger organizational
restructurings, sale, or closure of parts of
their business that are either marginally
associated with the impact from COVID-19
or not associated at all.
• Capitalization of expenses—It may
be tempting for companies to capitalize
expenses and deduct them over several
accounting periods rather than expense
them immediately. Outbreak-related costs
may be substantial, and executives may be
inclined to spread the costs out over a
few years, rather than expensing them
when incurred.
• Disclosure fraud—Companies may
be motivated to avoid fully disclosing
the impact of COVID-19 on its overall
business results, particularly with respect
to risks, uncertainties, contingencies,
and representations contained in their
public statements, and regulatory
filings. For example, particular concerns
may arise regarding companies’ or
their counterparties’ ability to satisfy
contractual obligations. The disclosure
should also include an assessment
of whether reliance on force majeure
provisions or common law principles of
nonperformance may apply. The adequacy
and sufficiency of such disclosures may
lead to claims of securities fraud by
regulators and investors.
• Margin manipulation—Many companies
are already experiencing significant decline
in revenues, closures of plants, facilities,
and storefronts, reduced transaction fees,
and declines in assets under management,
all while paying their employees and
supporting current-state cost structures.
Each of these actions increases the risk that
an organization’s profit margins could be
manipulated. There are many ways in which
this can be done, but organizations should
consider these risks and be aware of how it
could happen at their company.
• Pressures arising from “stock-drop”
litigation—Plaintiffs’ securities firms may
seek to capitalize on stock price drops
resulting from the crisis, leading to a slew
of new case filings. Efforts to avoid costly
litigation may lead to financial manipulation
resulting in the misrepresentation of not
only a company’s financial statements and
disclosures, but also of key performance
indicators in an effort to create “better than
expected” operating reports.
• Internal Controls over Financial
Reporting (ICFR)—The current economic
environment may result in increased
fraud risks related to internal controls. As
many organizations move to a virtual work
environment, there is a significant risk that
fraudsters may find new ways to override
existing internal controls, especially those
critical to ICFR. Such controls may include,
but are not limited to: segregation of duties,
delegation of authority, and information
systems access. With a potential decrease
in workforce, the rapidly changing nature of
working environments, and the possibility
of changes in individual responsibilities,
modifications to existing controls may
not happen with the same speed, or new
controls may be implemented without
sufficient testing of their design and/or
effectiveness. Accordingly, the nature,
timing, and extent of diligence performed
in a changing control environment create
increased opportunity for fraud.