In fraudulent financial statement cases, the fraud examiner must competently interview the CEO and CFO for one reason - they probably committed the crime.
This article is excerpted from the Fraud Examiners Manual, Third Edition Updated 2000-2001. © 2000 Association of Certified Fraud Examiners.
Financial statement fraud doesn't occur in an isolated environment. People in organizations who have both motive and opportunity are the prime candidates to commit fraudulent misstatement. In the overwhelming majority of situations, two key managers most often participate actively in the fraud: the Big Dogs, the chief executive and the chief financial officer. From there, the smaller pups - the staff members - become involved largely out of necessity. Those who aren't directly involved often aren't aware that anything is wrong.
The competent and experienced fraud examiner must have the ability to solicit honest answers from the CEO and CFO to tough - but vital - questions about whether anyone has tampered with the books.
Situations in which accountants are tempted to misstate financial statements most often involve pressure connected with financial performance. The following is a fictitious conversation between upper managers of a corporation.
CFO (to CEO): "Boss, it looks like we won't have a good year financially. We told the shareholders (or bank) that our earnings would be $4 a share, and it looks like we'll be very lucky to make $3."
CEO: "Well, what are we going to do about it? If we miss the earnings projections (or don't get the loan) our geese will be cooked; we'll both lose our jobs. We have to boost those earnings up to where they should be."
CFO: "What do you mean?"
CEO: "What I mean is that it's your job to bring in the numbers. You're going to have to find a way to get them up. I'm sure we can probably make up the difference next year, but for now, you get raise up our earnings (or assets or equity) however you have to. All financial statements are essentially estimates anyhow. So you figure out how to 'estimate' the numbers more in our favor. I don't know how to do it, and I don't want you to tell me. But get it done."