Fraudulent financial reporting (FFR) is the intentional omission of amounts or intentional withholding of vital information during the preparation of financial statements. Perpetrators manipulate records purposely to deceive people who benefit from such information. FFR ensues through forgery, manipulation, alteration, misrepresenting, and omitting transactions during the reporting. It is a breach of auditing principles that traverses disclosure and amounts. Fraudulent financial reporting involves techniques such as concealing of facts affecting recorded amounts, incorrect journal entries, as well as advanced or delayed recognition of transactions during the reporting period. The management instigates the action to deceive beneficiaries of the audit reports on the profitability and overall performance of the firm.
Although it is not rampant, fraudulent financial reporting is the costliest form of fraud when compared to corruption and misappropriation. Fraudulent financial reporting involves actions that obscure or understate expenses or liabilities, improper valuation of assets, withholding pertinent information, and overstating of revenues. Such intentional application inclines towards creating a false impression to the stakeholders or people who might be interested in investing in the organization. Techniques such as falsifying profits, intentional misreporting of costs, and interchange between periods of expenditure and revenue are common in propagating the vice. Repeating the action without detection impels an organization to rig its subsequent financial reports.
Misappropriation of assets is a form of fraud in which involved parties use tricks and deception to steal from the organization. In this form of fraud, people take away the assets of an organization to profit from their private lives. The partakers of the crime could be the company’s employees, suppliers, or people unrelated to the company. Misappropriation of assets involves receipt embezzlement and stealing physical goods, as well as intangible assets. It also involves manipulating the company to recompense for goods or services that it did not receive. Concealment through the generation of false records and documents accompanies FFR activities.
Techniques for misappropriation of assets involve skimming, larceny, misuse of company assets, and fraudulent disbursements. Skimming involves people taking funds before registration into the company’s financial records. Funds vulnerable to misappropriation arise from refunds and at the point of sale. Larceny involves stealing funds after entry into the organization’s records. Perpetrators take money from deposits, petty cash, or cash registers. Fraudulent disbursements occur when employees authorize payouts based on false invoices, forge checks for personal gain, claim reimbursements based on false assertions, manipulate time cards to receive the money they do not deserve, as well as, recording false sales at the cash register to conceal stolen cash. Theft of inventory and use of corporate equipment for personal gain comprises the non-cash forms of asset misappropriation. Motivation for asset misappropriation is due to the perceived weakness of internal control structures.
The main difference between fraudulent financial reporting (FFR) and misappropriation of assets is that misappropriations occur without the management’s intent to deceive, while the management pioneers FFR activities. FFR seeks to deceive shareholders or possible investors, while asset misappropriation seeks to profit workers who want to live beyond their means. When preparing financial statements, FFR affects profitability and omits information that could be useful to investors or shareholders. Asset misappropriation does not feature in the normal financial statements since it does not result from normal operating activity. Instead, an account of misappropriated funds suffices to show investors that the loss did not occur during normal operations. FFR directly affects entries in the financial reports to mislead users.