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Financial Statement Fraud: Prevention and Detection, 2nd Edition

Financial Statement Fraud: Prevention and Detection, 2nd Edition

Zabihollah Rezaee, Richard Riley

ISBN: 978-0-470-54323-8

Sep 2009

352 pages



Practical examples, sample reports, best practices and recommendations to help you deter, detect, and prevent financial statement fraud

Financial statement fraud (FSF) continues to be a major challenge for organizations worldwide. Financial Statement Fraud: Prevention and Detection, Second Edition is a superior reference providing you with an up-to-date understanding of financial statement fraud, including its deterrence, prevention, and early detection.

You will find

  • A clear description of roles and responsibilities of all those involved in corporate governance and the financial reporting process to improve the quality, reliability and transparency of financial information.
  • Sample reports, examples, and documents that promote a real-world understanding of incentives, opportunities, and rationalizations
  • Emerging corporate governance reforms in the post-SOX era, including provisions of the SOX Act, global regulations and best practices, ethical considerations, and corporate governance principles
  • Practical examples and real-world "how did this happen" discussions that provide valuable insight for corporate directors and executives, auditors, managers, supervisory personnel and other professionals saddled with anti-fraud responsibilities
  • Expert advice from the author of Corporate Governance and Ethics and coauthor of the forthcoming Wiley textbook, White Collar Crime, Fraud Examination and Financial Forensics

Financial Statement Fraud, Second Edition contains recommendations from the SEC Advisory Committee to reduce the complexity of the financial reporting process and improving the quality of financial reports.

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Part One: Financial reporting and Financial Statement Fraud.

1 Financial Statement Fraud Defined.

Will History Repeat Itself?

A Closer Look.

Definition of Financial Statement Fraud.

Nature of Financial Statement Fraud.

High-Impact Fraud Cases.

Cost of Financial Statement Fraud.

Fraud Studies and Regulatory Responses.

Antifraud Programs.

Occurrence, Prevention, and Detection.

Lessons Learned and Applications for Practice.


2 Financial Reporting Structure.


Financial Reporting System.

Importance of Financial Information.

Annual Financial Reporting Requirements.

High-Quality Financial Reports.

Six-Legged Stool of the Financial Reporting Process.

Corporate Financial Reports.

Corporate Reporting Challenges.

Financial Restatements.

Fair Value.

Stock Options Accounting.

XBRL- Generated Financial Reports.

Antifraud Applications for Practice.


Part Two: Finaicla Statement Fraud Profile, Taxonomy, and Schemes.

3 Cooking the Books Equals Fraud.


Why Does Financial Statement Fraud Occur?

Profile of Financial Statement Fraud.

Waste Management, Inc.: Financial Statement Fraud Analysis.

Antifraud Applications for Practice.


4 Realization, Prevention, and Detection.



The 3Cs Model.

Financial Statement Fraud Prevention.

Financial Statement Fraud Detection.

Correction Procedures.

Prevention, Detection, and Correction Strategies.

Antifraud Applications for Practice.


5 Taxonomy and Schemes.


Symptoms of Financial Statement Fraud.

Common Fraud Schemes.

Common Revenue Fraud Schemes.

Financial Statement Fraud Red Flags.

Whistle-blower Regulations.

Antifraud Applications for Practice.


Part Three: Corporate Governance and Its role in Preventing and Detecting Financial Statement Fraud.

6 Role of Corporate Governance.


Definition of Corporate Governance.

Role of Corporate Governance.

Corporate Governance Structure.

Characteristics of Corporate Governance.

Corporate Governance Functions.

Global Corporate Governance. 

Anti-Fraud Applications for Practice.


7 Board of Directors' Oversight Responsibility.


The Role of the Board of Directors.

Composition of the Board of Directors.

Functions of the Board of Directors.

Attributes of Boards of Directors.

Antifraud Applications for Practice.

Protocol: A Plan for Reaction to Allegations of Misconduct.


8 Audit Committees and Corporate Governance.


Audit Committee.

 Audit Committee Attributes.

Audit Committee Roles and Responsibilities.

Audit Committee Charters.

Chairperson of Audit Committees.

Audit Committee Report.

Audit Committees' Roles in Preventing and Detecting Financial Statement Fraud.

Antifraud Applications for Practice.


9 Management Responsibility.


Management Financial Reporting Responsibilities.

Management's Role in Financial Statement Fraud Prevention and Protection.

Management Motives and Incentives.

Management Override of Internal Control.


Risk Management.

Antifraud Applications for Practice.


10 Role of the Internal Auditor.


Internal Auditors and Corporate Governance.

Internal Auditors' Responsibilities.

Internal Audit Fraud Standards.

Efficacy of Internal Audit in Financial Statement Fraud Prevention and Detection.

Cooperation between External and Internal Audit.

Internal Audits and the Audit Committee.

Internal Control.

Antifraud Applications for Practice.


11 Role of External Auditors.


Independent Audit of Financial Statements.

Independent Auditor and Financial Statement Fraud.

Independent Audit and Internal Control.

The Report on Internal Controls.

Fraud Detection Audit Procedures.

Materiality Guidance.

Risk-Factors of Financial Statement Fraud.

Communication of Fraud.

Antifraud Applications for Practice.


12 Governing Bodies.


Role of Regulation in Corporate Governance.

Sarbanes-Oxley Act Of 2002.

Securities and Exchange Commission.

SEC's Regulation Fair Disclosure.

Financial Fraud Detection and Disclosure Act of 1992.

Private Securities Reform Act of 1995.

SEC and Financial Statement Fraud.

SEC Fraud Prevention Activities.

SEC Fraud Detection Activities.

SEC Fraud Enforcement Activities.

Role of the Financial Accounting Standards Board.

Antifraud Applications for Practice.


Part Four: Digital (Computer) Approaches to Fraud and Forensic Accounting.

13 Fraud in a Digital Environment.


Digital Economy.

Electronic Commerce.

Changes in Business Environment.

Electronic Financial Reporting.

Antifraud Applications for Practice.


14 Fraud Examination Practice, Education and Research.


The Interrelationship: Auditing, Fraud Examination and Forensic Accounting.

Forensic Accounting Practice.

Fraud Examination.

Certification in Financial Forensics.

Training Competent and Ethical Fraud Examinaers and Forensic Accountants.

Fraud Examination and Forensic Accounting Education.

Role of Research in a Profession.

Antifraud Applications for Practice.


Appendix: Summary of Six Recent Fraud Studies.

About the Authors.