Financial Statement Misrepresentation
It’s crucial that you know whether or not the items listed on the balance sheet are correct, be it due to innocent inaccuracy or intentional under or overvaluation. One of the most common types of financial statement misrepresentation issues is that of valuation. Often times the person keeping the financial records may be unfamiliar with the appropriate way to value an asset. This can dramatically affect the perceived value of a business, and in some cases it can give business owners or potential buyers a false sense of worth. Too often an inaccurate value is used to make significant business decisions, leaving business owners or business acquirers in a bind dealing with the aftermath of an uninformed decision. Conversely, if the inaccurate valuation is due to fraud then the risk of misrepresentation is much greater. Since fraudsters are intentionally manipulating the value it may continue for a long period of time undetected.
Separate from valuation, there are several other forms of financial statement misrepresentation that can occur. Inadequate disclosures and material transactions are two of the more important ones. If a company engages in self-dealings or substantial intercompany transactions that aren’t reported it could severely impact the true financial condition of that company. Similarly, if a company has a material change in accounting policies but fails to disclose those changes, then any apparent trends may actually be due to a change in accounting rules. For instance, if revenue recognition for a particular product is changed from being recognized in the period received to being amortized over a period of time then it could distort any trends in revenue.
Our goal is to help you identify red flags and other anomalies in your company data that will help uncover potential financial statement misrepresentations.