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Submitted By mikl657
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The five basic types of financial statement fraud are ("Detecting financial fraud," 2011):
-Fictitious sales
-Improper expense recognition
-Incorrect asset valuation
-Hidden Liabilities
-Unsuitable disclosures
If any of these are committed it can have drastic effects on a company’s stock price. This makes it attractive for CEO’s who are paid in stock to commit fraud. The CEO’s job is to look out for the best interest of its companies stockholders. But by giving CEO’s stock options it encourages them to look towards the next quarter rather than the long-term. For example Apple’s new CEO Tim Cook received a base salary of $900,000 in 2011, but due to stock options he will receive 376.2 million dollars in shares (Satariano, 2012). Now as the company grows those stock options will increase drastically, making his yearly salary look like chump change. This is what encourages CEO’s to commit financial fraud by altering the company’s books to drive the stock price up, which drives his pay up.
In 2002 the CEO of HealthSouth sold $100 million dollars in stock just days before the company posted a huge loss. HealthSouth over the course of seven years beginning in 1996 overstated their income by 2.7 Billion dollars ("Sec charges healthsouth," 2003). The CEO was accused of having senior accountants inflate the earnings of its facilities in order to drive up the company’s value. In addition they also misreported the sale of technology to a related party resulting in 29 million in overstatements as well. By middle of 2002 HealthSouth’s assets were also overstated by more than 800 million dollars ("Accountant describes how," 2005). How the fraud happened was the assistant controller at HealthSouth would download the companies true earnings on his computer and figure how much was needed to be made up to meet wall street’s predictions (Hamilton). While the company did have internal controls to counter-act fraud they were easily counter-acted. Any transaction over 5,000 was considered material and auditors would look into them. Therefore they made small transactions of 4,999 and less. This meant millions of falsified entries to cover up the fraud.
Financial fraud is a large problem for corporations in America. In order to counter-act it companies need to ensure proper segregation of duties and internal controls are put into effect so if any fraud is attempted it is stopped immediately. With the Sarbanes-Oxley Act of 2002 it also pointed out an important mechanism for stopping fraud by giving whistle-blower protection. By having anonymous reporting available to employees it allows the employees to report fraud without the fear of punishment. This will help companies such as HealthSource stop and prevent fraud in the future. This is because employees are the best sources of information within a company, and by holding your employees to high ethical standards it will make them want to do the right thing and stop fraud.

Detecting financial fraud. (2011, September 28). Retrieved from
Satariano, A. (2012, January 10). Apple ceo cook's 2011 compensation worth. Retrieved from
Accountant describes how healthsouth fraud happened. (2005, January 28). Retrieved from
Sec charges healthsouth corp. ceo richard scrushy with $1.4 billion accounting fraud. (2003, March 19). Retrieved from
Hamilton, C. (n.d.). Healthsouth: A case study in corporate fraud . Retrieved from…...

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