Fraud Risk Factor

A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasons

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor's work or the selection or continuance of personnel assigned to or consulted on the audit engagement

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Excessive interest by management in maintaining or increasing the entity's stock price or earnings trend

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Formal or informal restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with the board of directors or audit committee

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Ineffective communication, implementation, support, or enforcement of the entity's values or ethical standards by management or the communication of inappropriate values or ethical standards

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or board members alleging fraud or violations of laws and regulations

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Management failing to correct known reportable conditions on a timely basis

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Nonfinancial management's excessive participation in or preoccupation with the selection of accounting principles or the determination of significant estimates

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of the auditor's report

Attitudes/Rationalizations FRAUDULENT FINANCIAL REPORTING Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor:

Behavior indicating displeasure or dissatisfaction with the company or its treatment of the employee

Attitudes/Rationalizations MISAPPROPRIATION OF ASSETS Risk factors reflective of employee attitudes/rationalizations that allow them to justify misappropriations of assets, are generally not susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from misappropriation of assets.

Changes in behavior or lifestyle that may indicate assets have been misappropriated

Attitudes/Rationalizations MISAPPROPRIATION OF ASSETS Risk factors reflective of employee attitudes/rationalizations that allow them to justify misappropriations of assets, are generally not susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from misappropriation of assets.

Disregard for internal control over misappropriation of assets by overriding existing controls or by failing to correct known internal control deficiencies

Attitudes/Rationalizations MISAPPROPRIATION OF ASSETS Risk factors reflective of employee attitudes/rationalizations that allow them to justify misappropriations of assets, are generally not susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from misappropriation of assets.

Disregard for the need for monitoring or reducing risks related to misappropriations of assets

Attitudes/Rationalizations MISAPPROPRIATION OF ASSETS Risk factors reflective of employee attitudes/rationalizations that allow them to justify misappropriations of assets, are generally not susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from misappropriation of assets.

Adverse relationships between the entity and employees with access to cash or other assets susceptible to theft may motivate those employees to misappropriate those assets. For example, adverse relationships may be created by the following:

Incentives/Pressures MISAPPROPRIATION OF ASSETS

Known or anticipated future employee layoffs

Incentives/Pressures MISAPPROPRIATION OF ASSETS

Personal financial obligations may create pressure on management or employees with access to cash or other assets susceptible to theft to misappropriate those assets.

Incentives/Pressures MISAPPROPRIATION OF ASSETS

Promotions, compensation, or other rewards inconsistent with expectations

Incentives/Pressures MISAPPROPRIATION OF ASSETS

Recent or anticipated changes to employee compensation or benefit plans

Incentives/Pressures MISAPPROPRIATION OF ASSETS

High degree of competition or market saturation, accompanied by declining margins

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

New accounting, statutory, or regulatory requirements

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

Rapid growth or unusual profitability, especially compared to that of other companies in the same industry

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

Significant declines in customer demand and increasing business failures in either the industry or overall economy

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING A. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by):

Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING B. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:

Need to obtain additional debt or equity financing to stay competitive-including financing of major research and development or capital expenditures

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING B. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:

Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business combinations or contract awards

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING B. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:

Profitability or trend level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING B. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:

Personal guarantees of debts of the entity

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING C. Information available indicates that management or the board of directors' personal financial situation is threatened by the entity's financial performance arising from the following:

Significant financial interests in the entity

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING C. Information available indicates that management or the board of directors' personal financial situation is threatened by the entity's financial performance arising from the following:

Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow 1

Incentives/Pressures FRAUDULENT FINANCIAL REPORTING C. Information available indicates that management or the board of directors' personal financial situation is threatened by the entity's financial performance arising from the following:

A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or non-arm's-length transactions

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no clear business justification

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Significant operations located or conducted across international borders in jurisdictions where differing business environments and cultures exist

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult "substance over form" questions

Opportunities FRAUDULENT FINANCIAL REPORTING A. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:

Domination of management by a single person or small group (in a non owner-managed business) without compensating controls

Opportunities FRAUDULENT FINANCIAL REPORTING B. There is ineffective monitoring of management as a result of the following:

Ineffective board of directors or audit committee oversight over the financial reporting process and internal control

Opportunities FRAUDULENT FINANCIAL REPORTING B. There is ineffective monitoring of management as a result of the following:

Difficulty in determining the organization or individuals that have controlling interest in the entity

Opportunities FRAUDULENT FINANCIAL REPORTING C. There is a complex or unstable organizational structure, as evidenced by the following:

High turnover of senior management, counsel, or board members

Opportunities FRAUDULENT FINANCIAL REPORTING C. There is a complex or unstable organizational structure, as evidenced by the following:

Overly complex organizational structure involving unusual legal entities or managerial lines of authority

Opportunities FRAUDULENT FINANCIAL REPORTING C. There is a complex or unstable organizational structure, as evidenced by the following:

High turnover rates or employment of ineffective accounting, internal audit, or information technology staff

Opportunities FRAUDULENT FINANCIAL REPORTING D. Internal control components are deficient as a result of the following:

Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required)

Opportunities FRAUDULENT FINANCIAL REPORTING D. Internal control components are deficient as a result of the following:

Ineffective accounting and information systems, including situations involving reportable conditions

Opportunities FRAUDULENT FINANCIAL REPORTING D. Internal control components are deficient as a result of the following:

Easily convertible assets, such as bearer bonds, diamonds, or computer chips

Opportunities MISAPPROPRIATION OF ASSETS For example, opportunities to misappropriate assets increase when there are the following:

Fixed assets that are small in size, marketable, or lacking observable identification of ownership

Opportunities MISAPPROPRIATION OF ASSETS For example, opportunities to misappropriate assets increase when there are the following:

Inventory items that are small in size, of high value, or in high demand

Opportunities MISAPPROPRIATION OF ASSETS For example, opportunities to misappropriate assets increase when there are the following:

Large amounts of cash on hand or processed

Opportunities MISAPPROPRIATION OF ASSETS For example, opportunities to misappropriate assets increase when there are the following:

Inadequate access controls over automated records, including controls over and review of computer systems event logs.