Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p12
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 12/41)
Character Range: 44045–47330

Fraud, whether fraudulent financial reporting or misappropriation of assets, involves incentive or pressure to commit fraud, a perceived opportunity to do so and some rationalisation of the act.  For example:

           * Incentive or pressure to commit fraudulent financial reporting may exist when management is under pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target or financial outcome – particularly since the consequences to management for failing to meet financial goals can be significant.  Similarly, individuals may have an incentive to misappropriate assets, for example, because the individuals are living beyond their means.

           * A perceived opportunity to commit fraud may exist when an individual believes internal control can be overridden, for example, because the individual is in a position of trust or has knowledge of specific deficiencies in internal control.

           * Individuals may be able to rationalise committing a fraudulent act.  Some individuals possess an attitude, character or set of ethical values that allow them knowingly and intentionally to commit a dishonest act.  However, even otherwise honest individuals can commit fraud in an environment that imposes sufficient pressure on them.

A2.             Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in the financial report to deceive financial report users.  It can be caused by the efforts of management to manage earnings in order to deceive financial report users by influencing their perceptions as to the entity's performance and profitability.  Such earnings management may start out with small actions or inappropriate adjustment of assumptions and changes in judgements by management.  Pressures and incentives may lead these actions to increase to the extent that they result in fraudulent financial reporting.  Such a situation could occur when, due to pressures to meet market expectations or a desire to maximise compensation based on performance, management intentionally takes positions that lead to fraudulent financial reporting by materially misstating the financial report.  In some entities, management may be motivated to reduce earnings by a material amount to minimise tax or to inflate earnings to secure bank financing.

A3.             Fraudulent financial reporting may be accomplished by the following:

           * Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial report is prepared.

           * Misrepresentation in, or intentional omission from, the financial report of events, transactions or other significant information.

           * Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.

A4.             Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively.  Fraud can be committed by management overriding controls using such techniques as intentionally:

           * Recording fictitious journal entries, particularly close to the end of an accounting period, to