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How to Detect and Avoid Financial Statement Fraud


Financial statements are an important part of any business because they allow managers, business owners, and auditors to evaluate the performance of specific parts of the business. Moreover, they also serve as an overall metric of the success or failure of a business.


However, fraud in financial statements is quite common. It is important to rely on professional audit firms in Malaysia to prevent such frauds. Moreover, you should also be familiar with effective strategies so you can detect and prevent financial statement fraud.   


What is Financial Statement Fraud?

A financial statement or accounting fraud simply means an individual who misrepresents the financial metrics to get benefits by providing wrong information.


The purpose of such fraud is to alter the figures on financial statements and show a company to be more profitable than it actually is, misleading the investors and sometimes, even the auditors.


Weak accounting procedures, lack of internal corporate governance, and lack of auditing are some of the many reasons why a lot of companies suffer from financial statement fraud.


However, organizations that rely on professional accounting services and audit firms in Malaysia have a higher chance of preventing and avoiding accounting fraud in the first place. Certified accountants and professional auditors are very familiar with the effective strategies that can prevent financial statement fraud.


Let’s look at some of these fraud prevention strategies.  

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Three Major Reasons Behind Financial Statement Fraud

Pressure, opportunity, and rationalization are the three major reasons why organizations can suffer from financial statements fraud.


Pressure means that an employee can be under a lot of pressure due to financial problems. Such problems typically result from personal reasons, like substance abuse, relationship issues, and many other such reasons.


It is important to have efficient internal controls and audits so that the employees are not able to commit fraud.


Employees often rationalize their acts of fraud by making excuses, like the insurance will cover the losses, so they are not doing anything wrong.


However, it is important to get help from the experts and professional accounting services in Malaysia to prevent and eliminate such fraud from your company.



1. Significance of Internal Controls

Management must adopt internal controls to avoid fraudulent activity. The internal controls can vary from company to company.


Generally, they include dedicated methods and documents for obtaining expenditure reimbursements and maintaining maximum transparency throughout the company.


Furthermore, having a comprehensive buying system is also important, especially in large-scale organizations regularly involved in buying a wide range of products and raw materials.


If you are using the services of a professional auditor accounting firm in Malaysia, you will also get benefits like surprise audits and compliance with the legal rules to ensure compliance.



2. Duties Segregation

Segregation of tasks is one of the most important aspects of an efficient internal control system. By lowering the incentives for fraud, management aids in the prevention of fraud.


When accounting operations are separated, the chance to perpetrate fraud is diminished.


In the accounting process, the act of separating tasks separates the record-keeping, authorization, and review activities.


In other words, different experts and professionally trained individuals will be performing a set of duties within an organization. As a result, the chances of fraudulent activities will be significantly reduced.



3. Strong Ethics Policies

It should go without saying that having strong ethical values and policies is the key to preventing fraud throughout an organization.


It is important for the executives to set a strong tone at the top to demonstrate strong ethical behaviour throughout an organization.


Experts agree that whatever tone is set by the management will have a trickle-down effect on the organization’s employees.

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The Bottom Line

Audit firms in Malaysia provide professional auditing services to help companies maintain compliance and strong ethical policies.


Businesses should rely on such professional services by conducting an annual inspection of the financial statements by external auditors. It will make sure that an audit is free from the influence of the employees, as well as the executives of a company.


Financial statement fraud also includes making aggressive adjustments to the financial statement, so it is important to have independent auditors who can examine the financial statements without any pressure.


The specific type and frequency of the audits depend on the scale and type of a company. A small company, for example, typically needs an annual audit, while quarterly audits are recommended for large-scale organizations.


A professional accounting firm in Malaysia can easily recommend and implement the best accounting and audit standards in your business.