15 Warning Signs of Financial Statement Fraud according to COA’s Financial Audit Manual

What is financial statements fraud?

According to Scott Beaver, financial statement fraud is the deliberate misrepresentation of a company’s financial statements, whether through omission or exaggeration, to create a more positive impression of the company’s financial position, performance and cash flow.

When it comes to financial statement fraud, most cases involve intentionally misrepresenting accounting such as overstating revenue, fictitious transactions, concealment of liabilities and obligations, improper or inadequate disclosures, falsifying expenses, misappropriations, etc.

In the public sector or in the government, the Commission on Audit provides in its Financial Audit Manual some examples of circumstances that may indicate the possibility that a government agency may be committing fraud in its financial statements.

Below are 15 examples of those circumstances:

1. The agency does not record its transactions in a timely manner or even if they are recorded, the agency is recording them improperly as to amount, accounting period, classification or entity policy.

2. Agency transactions are unsupported with proper supporting documents or the same are unauthorized.

3. The agency does last-minute adjustments that significantly affect the financial statements.

4. Unauthorized employees can access or have access to the agency’s financial systems and records.

5. The Resident Auditor receives tips or complaints that the agency is allegedly committing fraud.

6. The agency has missing financial documents.

7. Documents appear to have been altered.

8. The agency cannot provide original documents to support its transactions.

9. There exist significant unexplained items or reconciliations.

10. There exist unusual balance sheet figures; for instance, receivables are growing faster than income.

11. The agency has unusual discrepancies between its records and confirmation replies.

12. The agency has large number of credit entries and other adjustments made in its accounts receivables.

13. Unexplained or inadequately explained differences between accounts (e.g., customers accounts vs. Accounts Receivables account).

14. Missing or non-existent cancelled checks in circumstances where the bank ordinarily return to the agency its cancelled checks together with its bank statements.

15. The agency or its employees’ responses to inquiries or the conduct of analytical procedures are inconsistent, vague, or implausible (unconvincing).

Source: Pages 34 to 35, Financial Audit Manual, Commission on Audit

Our Takeaways

🙋‍♀️ It is essential to learn these signs of financial statements fraud in order to avoid them or prevent them from happening to our respective agencies.

🙋 Being aware of these signs of financial statements fraud would help us improve the existing internal control system of our agency.

Read: 10 Components of an Effective Internal Control System according to COA

🙋‍♀️ We could help our agency prevent unnecessary adverse audit findings from the Commission on Audit by knowing these financial statements fraud and implementing strict internal controls to prevent them from being committed by our agency.