Frauds in financial statements - prevention and detection responsibilities

Misstatements or irregularities in financial statements may be caused by frauds and errors. Unlike an error, which represents unintentional failure, usually made by the client's accounting staff, fraud represents an intentional act that is usually motivated by acquiring unjust material benefits and creating deceptive financial statements. In this article, the emphasis is on fraudulent presentations in financial statements (since frauds occur in all segments of the economy). Namely, every company is exposed to risk of fraudulent presentations in financial statements, regardless of the form, ownership, size, and other features of a business. Misstatements, or fraudulent presentations in financial statements, may be caused by fraudulent financial reporting and misappropriation of assets. In order to minimize the risk of frauds in financial statements, active participation of all participants in the financial reporting chain is required: from the management - who are responsible for the preparation and presentation of financial statements - to external auditors, who determine the credibility of such reports. In the context of this paper, authors deal with fraud risk factors or factors that indicate a fraud as well as responsibilities for their prevention and detection. In the context of the responsibility for preventing and detecting frauds in financial statements, roles of different participants in the chain of financial reporting are considered, with a focus on distinguishing responsibilities of management, internal, and external audit.