Dealing with financial statement frauds with J- Score


Financial Statement Frauds are the deliberate and false representation of the financial performance of business. It could be the willful mis-statement or omission of amounts or disclosures in the Financial Statements.

The resultant loss due to Financial Statement Frauds are huge as it affects all the users of Financial Statements at large. One of the foremost accounting fraud cases in India was the Satyam Accounting Fraud. Satyam’s erstwhile chairman confessed of inflating the financial statements for seven years. This was one of the historical cases which highlighted the importance of the forensic auditing.

Forensic Rating to deal with balance sheet frauds

Satyam scam was the reason for the birth of J-score. Launched in 2011, J-score is the base of the forensic rating model. Forensic rating model is build to identify the creative accounting practices. It is a statistical equation based on financial reporting of the listed companies.

The emphasis of the forensic rating model is cash flows. It is based on the premise that you can pretend to be rich but you cant pretend to be cash rich. In order to understand this model its necessary to understand the warning signs of the financial frauds.

Different type of financial frauds were analyzed during the process of building this equation. Let us consider inventory as the tool used to cook the books. This can take several forms, including fictitious inventory, overstating assets and theft of inventory etc.

Inventory valuation throw a number of red flags such as change in cost of sales, inventory turnover etc. These red flags are converted to numerical equations by assigning weights to every such red flag in the J score calculation. More than 100 red flags associated with different elements of balance sheet are considered in calculations.

Why people commit Financial Statement Frauds?

Many people commit financial statement fraud for personal gain. But primary reason for committing Financial Statement Fraud is make the financials of the business appear to be better. There are multiple reasons for committing Financial Statement Frauds are as under:

  • To boost the stock prices.
  • To beat the analysts expectations and
  • To raise money from the bankers

How are Financial Statement Frauds committed?

Financial Statement Frauds usually takes place in the following four ways:

  • Overstatement of Assets to reflect a stronger company
  • Overstatement of Revenue to show fictitious growth in the company
  • Understatement of Expenses to inflate the profit of the company
  • Understatement of Liabilities to show a better picture of the company

Entities sometimes even does the inverse of the above to get favorable conditions for loan settlement or show wrong insolvency conditions.

These result in increased net worth of the company and provides more stable picture of the company.

How to prevent balance sheet fraud?

  • Reduce the Pressures that encourage Financial Statement Fraud
  • Reduce the opportunity to commit fraud by maintaining complete and accurate accounting records, etc.
  • Should train the employees by conducting various training seminars and
  • A proper and robust system of Internal Controls must be implemented in the entity.

Certification in financial statement fraud examination

Forensic rating model is globally acceptable but it has provided the best results on the Indian listed companies. It requires the details of company performance for a period more than two fiscal years.

In order to create awareness about the fraud examination of the financial details, India forensic launched the certification program. The Certified Stock Market Forensic Accountant (CSMFA) deals with two aspects

  1. The stock market trading frauds and
  2. Financial Statement frauds

This is the only comprehensive program in India to deal with the creative accounting. In case you need any information on the financial statement frauds related certification please feel free to contact us on +919766594401.