Colin Greenland | Can we trust financial statements?
In today’s modern era, the information supplied by accountants to their employers continues to be increasingly critical, and the success of organisations depends heavily on the accuracy of the financial information supplied on an ongoing basis. Audited financial statements are prepared annually, but long before the external auditor receives the financial information for review, balance sheets, profit and loss statements, cash flow statements, and other related data are required periodically (most times, monthly) to assist management and board directors to make informed decisions.
Can we, however, trust this information as the pressure placed on our number crunchers to report good results can influence some to manufacture misleading data in the interest of self-preservation?
A survey conducted by FloQast, a provider of close management software for corporate accounting departments, found that 64 per cent of controllers feel pressure to “cook the books”, with 10 per cent of them stating that it’s just part of their job.
For the report, FloQast and Dimensional Research surveyed 306 accounting and finance professionals, including more than 200 controllers from the United States, Canada, Europe, Asia, Africa, and Latin America. The survey also pointed to other pressures on controllers, with 89 per cent of the respondents saying that the controller’s job is more stressful.
The main stresses include:
- Management demands for speed (67 per cent);
- Higher volume of work (64 per cent);
- Compliance demands (63 per cent).
The respondents were asked if they had ever felt pressure, either directly or indirectly, for financial reporting to be less accurate in order to produce a better view of company performance.
The report stated: “The role of the controller is uniquely tied to factual results. Unlike marketing or operational roles where project success or failure can be tied to looser metrics, it is the job of the controller to give a clear and factual reporting of a company’s finances. However, it is also a position where those facts can be uncomfortable for a company, with significant negative repercussions when things go bad, ranging from investor reaction to employee morale. This creates the perfect environment for a job with pressure to overlook or misreport negative realities.”
CATEGORISING MISLEADING STATEMENTS
It would be interesting to see the results of a similar survey in Jamaica, assuming that respondents had the courage to answer honestly or could do so anonymously. Everywhere around the world, inaccurate, incorrect or fictitious accounting information are presented. The Association of Certified Fraud Examiners has categorised the main methods used.
The main ones utilised include:
- The overstatement of assets or revenue;
- Exploiting timing differences;
- Booking fictitious revenues;
- Concealing liabilities and expenses;
- Including improper disclosures;
- Using improper asset valuations.
These misleading financial statements are sometimes concocted with the knowledge and consent of management and presented to actual or potential users of the statements, with a view to misleading the users for reasons that will benefit management. Since management has the responsibility of preparing financial statements, it is difficult for financial statement fraud to be committed without some knowledge or consent of management, although the actual misstatements or omissions can be carried out by subordinates who are afforded the opportunity to do so.
Misleading financial statements are perpetrated against persons such as company owners, lending institutions, and investors for such reasons as to create illusions of profitability, where there is little or none; induce new or increased investments; and distort management performance (especially for bonus purposes).
By the time the external auditors come in and make the relevant adjustments to finalise the true picture, the damage may already have been done. For example, a lender who grants a loan to an organisation whose ability to repay was assessed on unaudited financials that were inaccurate may have difficulty securing regular repayments when the true position is finally revealed.
To mitigate the risks of receiving inaccurate financial information, boards must ensure that their internal auditors’ work programme includes constant and vigilant review of the data produced by their accounting personnel.
In addition to also ensuring that the internal control mechanisms are intact and proficient, other things such as whistleblowing policies can help since they offer employees aware of these ‘shenanigans’ the chance to alert the organisation if they so require.
Ideally, we would all like to assume that our number crunchers are all honest, ethical, and moral upstanding professionals, but alas, in the real world, that is not always so. Vigilance is the key, and it may start with seriously considering if your financial statements can be trusted.