17: Financial Statement Fraud: Motivation, Methods, and Detection

This chapter reports on fraud in corporate financial statements, while focusing on publicly traded firms. But before proceeding, clarifying how financial statement fraud is related to other forms of unethical or criminal behavior in companies is worthwhile. A recent annual report of the Association of Certified Fraud Examiners (ACFE) notes that, “[a]mong the various kinds of fraud that organizations might be faced with, occupational fraud is likely the largest and most prevalent threat” (Association of Certified Fraud Examiners 2018, p. 6). Occupational fraud is defined as “fraud committed against the organization by its own officers, directors, or employees” (Association of Certified Fraud Examiners 2018, p. 6). In effect, it is an attack on the company from within by the very people entrusted to protect it. Accounting fraud is a form of occupational fraud, but not all (or even most) occupational fraud is accounting fraud. To understand why, consider that occupational fraud falls into three broad categories: (1) corruption, (2) asset misappropriation, and (3) financial statement fraud.