Risk Management Implications for Forensic Accountants and Auditors

• In Event: Financial Statement Fraud, Internal Audit, and Risk Management Implications for Forensic Accountants

Abstract

Fraudulent financial reporting has been an issue since the advent of financial statements. This type of fraud costs approximately $1 trillion dollars per year in the United States (ACFE, 2008). Risk management should be a key concern of forensic accountants, auditors, and board members in order to assess the possibility of fraud in any organization. Weak risk management can indicate weak corporate governance and weak board of directors which may facilitate fraudulent financial reporting by management. Unfortunately, such concern is often not the case. Fraud risk management helps corporate governance boards identify misconduct, gain insight into enhanced internal fraud assessments, improve business operations, and achieve quality reporting. We provide a series of measures that facilitate fraud detection and offer a practical application to demonstrate their effectiveness. Our fraud risk indicators include earnings, operating cash flows, revenues, accruals, and bankruptcy prediction scores. We employ our measures to Kaisa, a Chinese property developer, located in Shenzhen but incorporated with limited liability in the Cayman Islands. Kaisa has been involved with an initial public offering and debt issuances through subsidiary entities that enabled the firm to navigate funding restrictions in China. We believe our analyses can assist not only a firm’s internal governance, but also auditors, who are responsible to detect fraudulent activity that would result in a material misstatement in the financial statements. We also believe our analyses may assist audit teams’ fraud brainstorming discussions as part of their consideration of fraud according to Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit.

Authors

• Adam Greiner, University of Denver

• Hugh D Grove, University of Denver

• Maclyn Clouse, university of denver