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Financial Statement Fraud Drivers

Why do companies falsify financial statements? Most of the top reasons have nothing to do with maximizing shareholder return, and everything to do with management's return.

In Exit Strategy, financial statement red flags help forensic accountant Kat Carter uncover a massive blood diamond laundering scheme.

Some of the top reasons for financial statement fraud are listed below, along with some things to watch for.

1. To maxmimize senior management's compensation. This is probably the most common driver.  If the fraud remaines undetected, the too-good-to-be-true financial results can lead to huge wealth and recognition for management. Their bonuses are based on it. Many of today's convicted fraudsters were once revered for their successes, touted as "the best" in their field. 

2. To maintain or increase the company's stock price.  Often senior management has a significant stake in the company's stock.

3. To cover up an underlying problem, like high debt.  If debt is high relative to other financial statement items, such as assests, revenues, or income, it can throw off the bank ratios.  Banks require borrowers to keep debt at a certain level relative to assets or income. If a company doesn't, the bank will call the loan (demand immediate repayment).  Losing this financing can spell disaster to an over-leveraged company.
And, as you probably guessed, this impacts management compensation too. So, beware of companies with high debt, even if they appear to be fine.

In my next post I'll touch on some financial statement red flags that could indicate a fraud.

Read more about Katerina Carter and Exit Strategy at