Why does fraudulent financial reporting take place?

Fraud is intentional act made by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unfair or illegal benefit.

Management may intentionally misstate financial statements if their performance is assessed and they are paid bonuses depending for example on growth of company revenue, profit, expenses reduction and so on. When management intentionally distorts financial statements with the goal to get some benefits the term "management override of   internal control” is used.

Management can override internal controls in following ways:

·        Booking journal entries in general ledger to increase revenue and profits.

·        Making significant transactions outside the normal course of business.

·        Manipulated accounting estimates (provisions, reserves, depreciation)

Although the level of risk of management override of controls will vary from company to company, the risk is nevertheless may be present in all companies.

So, the auditors always keep in mind that management override of control is a significant risk and they are perform corresponding procedures.

 

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