MANIPULATION OF FINANCIAL STATEMENTS Rizky Windar Amelia Economics Faculty of Widya Dharma University Klaten Abstract The role of a financial report in the presentation of financial statements, each institution or company that makes the report has desire to make outstanding financial statement in accordance with their interests. Nowadays, there are many cases in which both big and small companies deliberately beautify the financial statements for the sake of the company itself. Basically, there are generally two main strategies in manipulating financial statements (financial shenanigans), like inflating and shrinking income. INTRODUCTION The financial statement published by every company has its own function for its users. As an example, the company's internal management financial statements can be used as an evaluation of company performance, compensation and career development. Not only for internal parties, financial statements are also needed from outside parties as the basis of tax calculation for the government, as consideration in giving credit to creditors, and also as a benchmark for corporate performance for investors. According to the Financial Accounting Standards issued by the Indonesian Institute of Accountants (2007), the purpose of financial statements is to provide information regarding the financial position, performance, and changes in the financial position of a company that is beneficial to a large number of users in decision making. The role of a financial report in the presentation of financial statements, each institution or company that makes the report has desire to make outstanding financial statement in accordance with their interests. To attract investors, the company may present the profit in its financial statements more than it should be or do the opposite by reducing the profit from which it should be to avoid the amount of tax. Because of that, each financial report needs to be audited by the auditor to be verified. Nowadays, there are many cases in which both big and small companies deliberately beautify the financial statements for the sake of the company itself. Tuanakotta (2013), states that detecting financial statement manipulation for tax purposes is easier than detecting financial statement manipulation for the purpose of credit banking and capital markets. LITERATURE REVIEW Manipulation In accounting and auditing, the word manipulation is often used, generally it has negative meaning (Tuanakotta, 2013: 01). In fraud definition, "manipulation": is intentional is done with malicious intent, covertly, and deliberately covering important facts the goal is to gain unlawful profits 477
Fraud in the financial statements according to the Professional Standards of Public Accountant (PSPA) in Statement of Audit Standard No. 16 is called irregularities. Irregularities show a intentional distortion of financial statements, like deliberately exposing misrepresentations by management. Features and objectives of financial statement manipulation for tax purposes are by suppressing the rate of taxable income (RTI). This manipulation is carried out with deflating, shrinking or RTI understatement. This is relatively more difficult than the inflated or overstatement in earnings and net profits made in bank credit or capital market; which in the capital market is done with the inflation of earnings per share. Fraud in financial statements according to Rezaee (2005) cited by Wardhani (2012) is as follows: "Financial statements fraud is a intentional attempt by corporations to deceive or mislead users of published financial statements, especially investors and creditors, by preparing and disseminating materially misstated financial statements ". According to Rezae (2005), fraudulent of financial statements may be related to several schemes such as: (1) falsification, alteration, or manipulation of financial records, supporting documents or business transactions; (2) material intentional misstatement, deletions, or misrepresentations of events, transactions, accounts or other significant information that is the information source of financial report; (3) application error and intentional misinterpretation and execution of incorrect accounting standards in the application of principles, policies and methods used to measure, acknowledge and report on economic events and business transactions; (4) intentional omission of disclosure or inaccurate disclosure presentation in relation to standards, principles, accounting practices based on the available accounting standards that have weaknesses that may be used by the company to cover the economic substance of its performance. The Association of Certified Fraud Examiners (ACFE) in Efitasari (2013) describes several reasons why financial report fraud can occur, including: a. To make the company's stock look more attractive and encourage investment b. To increase earnings per share and allow for increased dividend pay outs. c. To obtain additional financing or more favorable terms on existing financing. d. To meet company goals and objectives. e. To produce bonuses based on financial performance According to Ferdian, et al. (2006), fraud in financial statements may involve actions such as: Manipulation, counterfeiting, or alteration of accounting records or supporting documents that serve as source of data for the presentation of financial statements. Deep representation or omission of any portion of financial reports, events, transactions or significant information. 478
Intentional misrepresentation of accounting principles related to quantity, classification, presentation, or disclosure. Financial reporting fraud according to Arens, et. Al. (2005), states: fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosure with the intent to deceive users. Most cases of fraudulent financial reporting involve the intentional misstatement of amounts not disclosures. Fraudulent financial reporting is an "intentional" act of making financial statementsbiased so that it can deceivefinancial statement users. Intentional action can be in the form offinancial statement manipulation, misapplied, and misrepresentation of financial statements. Financial statements Financial statements are written reports that provide quantitative information about the financial position and its changes, as well as the results achieved over a specified period. It can serve as media that can be used to examine the health condition of the company, in which the financial statements consist of balance sheet, profit and loss statement, summary of retained earnings and statement of financial position. The financial statement according to the Financial Accounting Standards (FAS) is a part of a complete financial reporting process which usually includes the balance sheet, income statement, statement of changes in financial position which can be presented in various ways such as: cash flow statement or fund flow report, note, and other reports and explanatory material that is an integral part of the financial statements. It also includes schedules and additional information related to the report, such as financial information on industry and geographical segments and disclosure of the effects of price changes. The financial statements that have been prepared have the purpose to provide financial information about a company to the parties concerned as consideration in making economic decisions. Financial Accounting Standard explains that the purposes of financial statements are: 1. To provide information regarding the financial position, performance and financial position changes of a company which is beneficial to a large number of users in economic decision-making. 2. Financial statementis prepared to meet the needs by most users who generally describe the financial effects of past events. 3. The financial statements indicate what management do or the responsible of management for the resources entrusted to it. How to Manipulate Financial Report Basically, there are generally two main strategies in manipulating financial statements (financial shenanigans), like inflating and shrinking income. Inflating income is considered having more serious impact, because it does not reflect the actual company performance, or as if the income was better. Meanwhile, shrinking income is not problematic, because it is one of the forms of earnings management. 479
Howard Schilit is the book author of 'Financial Shenanigans` released in 1993. At that time, people were not aware to this problem. However, as soon as the scandal of Enron and other US companies were revealed, he immediately became famous. Here are seven categories of financial shenanigans techniques commonly used according to Schilit (1993): 1. Too early in recording the income, for example: recording the revenue when there are still many service activities that have not been done recording the revenue from items which are not yet shipped recording the revenue from items that have not been received by the clients recording the sales made with affiliates 2. Recording fictitious income, for example: recording the sales without any reason classifying the returns from investment as income recording the cash obtained from borrowing transactions as income recording the discounts from suppliers as revenue 3. Creating a special transaction to gain something, for example: selling undervalued assets to make profit selling the investment and getting the gains, then records it as income reclassifying a number of accounts in the balance sheet to create revenue 4. Either recording or reducing the debt properly, for example: does not include related expenses and debts modifying assumptions to reduce debt not recording unearned revenue 5. Diverting the current load to the past or future period, for example: reclassifying the capitalized costs into operating expenses increasing asset life to reduce the amortization load reducing reserve assets does not record the impaired assets changing the accounting practices to divert the current expenses to the previous period changing the accounting assumption to reduce the reported debt not recording the unearned revenue 6. Holding current income for future periods, for example: increased allowance for bad loans increased warranty and returns 7. Transfer the burden that will come to the current period, for example: inflating theone-time charge increasing the burden for R & D, advertising, and so on recognizing the expenses that will provide economic benefits to the company, such as R & D, advertising and so on. Prevention of Financial Statement Manipulation Prevention of fraud in general is an activity undertaken by management in terms of determination of policies, systems and procedures that help to ensure that necessary actions have been 480
done by boards of commissioners, management, and other personnel of the company to provide reasonable assurance in achieving 3 (three) main objectives namely; reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws & regulations (COSO: 1992). To prevent the occurrence of fraud, referring to Albrecht, et. Al. (2009), one way that companies can do is to pay attention to the following things: 1. Have a good control system Regarding to internal control, the Committee of Sponsoring Organizations (COSO) requires companies to have an internal control framework as follows: a. Good control environment b. Risk assessment c. Good control activities d. Good communication and information flow e. Supervision 2. Inhibits the occurrence of collusion. 3. Supervise employees and provide telecommunication channels for fraud reporting. 4. Create punishment that will be applied when doing fraud. 5. Conduct proactive examination. Effendi (2006) argues that fraud prevention can be done by protecting corporate information systems. Furthermore, the most effective method of obtaining system security is by increasing employee integrity and reducing employees who do the fraud by paying attention to: - Hiring and firing practice. These should be done meticulously. - Managing disgruntled employees. Many employees commit fraud for retaliation or justice to the mistakes that have been inflicted on them. - Employee training. Fraud is much less likely to occur in an environment where employees believe that security is a shared responsibility, both employee and management. The National Commission on Fraudulent Financial Reporting recommends actions to reduce the possibility of fraudulent financial reporting, namely: - Establishing an organizational environment that contributes to the integrity of the financial reporting process. - Identifying and understanding the factors that lead to fraudulent financial reporting. - Assessing the risk of fraudulent financing reporting within the company. - Designing and implementing adequate internal controls for financial reporting. REFERENCES Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., and Zimbelman, M. 2009. Fraud Examination. (3rd ed.). Mason, USA: South-Western Cengage Learning. Arens, A. A., Elder, R. J., and Beasley, M. S. 2005. Auditing and Assurance Service An Integrated Approach. 10 th Edition. Prentice Education International. 481
Effendi, M. A. 2008. Tanggung Jawab Akuntan Publik Dalam Pencegahan dan Pendektesian Kecurangan Pelaporan Keuangan. Majalah Akuntan Indoenesia, edisi No.6/Tahun II/Maret. Efitasari, H. 2013. Pendektesian Kecurangan Laporan Keuangan (Financial Statement Fraud) Dengan Menggunakan Beneish Ratio Index Pada Perusahaan Manufaktur Yang Listing Di Bursa Efek Indonesia Tahun 2010-2011. Universitas Negeri Yogyakarta. Ferdian, Riki, dan Na im A. 2006. Pengaruh Problem-Based Learning (PBL) Pada Pengetahuan Tentang Kekeliruan dan Kecurangan (Error and Irregularities). Simposium Nasional Akuntansi (SNA) 9 Padang.. Ikatan Akuntan Indonesia. 2007. Standar Akuntansi Keuangan. Jakarta: Salemba Empat. Ikatan Akuntan Indonesia. 2001. Standar Profesional Akuntan Publik. Jakarta: Salemba Empat. Schilit, Howard M. 1993. Financial Shenanigans: How to Detect Accounting Gimmick and Fraud in Financial Reports. New York: Mc Graw-Hill, Inc. Tunakotta, T. M. 2013. Mendeteksi Manipulasi Laporan Keuangan. Jakarta: Salemba Empat. Wardhani, R. 2012. Faktor-faktor Penyebab dan Konsekuensi dari Kecurangan Pelaporan Keuangan (Fraud): Suatu Tinjauan Teoritis. (http://www.bpk.go.id/) 482