Financial Reporting Fraud Essay Example | Topics and Well Written Essays - 1000 words

Financial Reporting Fraud - Essay Example There are four constraints stipulated in the GAAP. The objective principle which states that the information provided by an account in the financial statements should be based on tangible evidence. There is the materiality principle which says that an item should be reported in the financial statements on if it is capable of affecting decision making of the user of the statements . The consistency principle requires a company to use the same accounting principles, guidelines and methods in the preparation of the financial statements from each period to another.   However, fraudulent company employees and executives with the intention to swindle the company some funds or for personal gain consciously circumvent the aforementioned assumptions, principles and constraints. The methods involved are very complex and usually involves overstatement of revenue, understatement of expenses, misuse or misdirection of funds, misreporting of the assets and liabilities of the company. This is wha t is referred to as financial reporting fraud.  To obtain additional funds from a financing institution such as a bank, to report unrealistic profits and hide losses so as to evade accountability by the top executive of the company, attract customers and investors by making the company to appear more successful than it is, to achieve a performance related bonus or incentive by the employees and to conceal theft either by the employees or the company executive. An example of a major accounting scandal in the United States is the Enron Scandal.