(PDF) Effects of Firm Characteristics on Financial Statement Fraud

Chapter One of Effects of Firm Characteristics on Financial Statement Fraud
INTRODUCTION
Background to the Study

The Institute of Internal Auditors (IIA) (2001) defines fraud as “an array of irregularities and illegal acts characterized by intentional deception”. Turner (in Elliot & Willingham, 1980:97) and Robertson (2002:5) define fraud more broadly as “all means that human ingenuity can devise, and which are resorted to by an individual to get an advantage over another by false suggestions or suppression of the truth”. This type of fraud includes surprises, tricks, cunning, dissembling and any other unfair way by which another person is cheated. The definition of financial statement fraud is essentially the same as that of fraud, apart from a few additional aspects.
The International Standard of Auditing (lSA) 240 (IAASB, 2007:272) defines corporate fraud as “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Financial statement fraud is thus fraud committed by the management of an organization with the goal to artificially improve the financial performance and results of the company as stated in the financial statements. This is done most often by means of overstating assets and revenue or understating liabilities and expenses.
Financial statement fraud must be clearly distinguished from non-fraudulent earnings management and accounting errors. Non-fraudulent earnings management takes place when a legitimate generally accepted accounting practice (GAAP) method is applied, but only because it has a favorable impact on the financial statements (Rezaee, 2002). An example is a company’s management decision to use certain inventory valuation or depreciation methods. Such practices must, however, also be looked upon critically, as it can lead to greater accounting risk in the financial statements of a company.
Accounting risk refers to the increased risk of a company’s management perpetrating financial statement fraud at some stage in the future to improve the appearance of financial performance and position. The research therefore seek to investigate Effects of firm characteristics on financial statement fraud –A case study of Total plc.

Statement of the Problem

Financial statement fraud has larger implications than many managers realize. For many, it is only a means to improve results, but apart from harming the company in which it is being perpetrated, it can also affect economic markets.
Rezaee (2002:7) gives the following summary of the potential harmful effects of financial statement fraud: it undermines the quality and integrity of the financial reporting process; it jeopardizes the integrity and objectivity of the accounting profession; it diminishes the confidence of capital markets and market participants in the reliability of financial information; it makes the capital market less efficient; it adversely affects a nation’s growth and prosperity; it may result in litigation losses; it destroys the careers of individuals involved in the fraud; it causes bankruptcy or economic losses by the company engaged in the fraud; it encourages a higher level of regulatory intervention; and it causes destructions to the normal operations and performance of the alleged companies. At least for the above reasons, it is necessary to attempt the prevention of fraud incidences. A profile that is developed to analyse a company’s character and situation can help interested parties in a proactive way to protect their interests. Therefore, The problem confronting the research is to determine the effect of firm characteristics on financial statement fraud using Total Plc as the case study.

Objectives of the Study

To determine the effects of firm characteristics on financial statement fraud.
To determine the effects of firm characteristics on financial statement fraud in Total Plc.

Research Questions

What is the Effect of firm characteristics on financial statement fraud?
What is the Effect of firm characteristics on financial statement fraud in Total Plc?

Research Hypothesis

Ho: The Effects of firm characteristics on financial statement fraud in Total plc. is low.
Hi: The Effects of firm characteristics on financial statement fraud in Total plc. Is high.

Significance of the Study

The study elucidate on the Effects of firm characteristics on financial statement fraud, a case study of Total plc. Financial statement fraud has larger implications than many managers realize. For many, it is only a means to improve results, but apart from harming the company in which it is being perpetrated, it can also affect economic markets.

Scope of the Study

The study focuses on the appraisal of the Effects of firm characteristics on financial statement fraud –A case study of Total plc.

Limitations of the Study

The study was confronted by some constraints including logistics and geographical factor.

Chapter One of Effects of Firm Characteristics on Financial Statement Fraud INTRODUCTION Background to the Study