Financial statement fraud

The US corporate scandals have put financial statement fraud under the spotlight. Questions arise not only as to whether a company has attempted to illegally manipulate its accounts, but also whether its auditors are party to an attempt to mislead its investors, lenders and other stakeholders. Paul Barnes, Professor of Fraud Risk Management and Director of the International Fraud Prevention Research Centre, Nottingham Business School, and Jill Lambell of Leeds Business School review the literature on this topical area.

Much has been written on red flags for financial statement fraud (FSF). Ironically, a lot of the material has been written by the professional auditing institutes in the form of guides for their members and by American academics, who have not only tested the relative efficacy of the main red flags but also developed and extended them as causes. Very little has been written by professional investigators. It is the purpose of this article to review and summarise the findings and recommendations but also to re-examine the subject as it has been affected by developments in the USA.