Financial Statement Fraud: A Case Study of Accounting Manipulation in Norway

Camilla Hambo Eiken & Emilie Alexandra Linde Sandstad

Student thesis: Master thesis

Abstract

The purpose and problem statement of the thesis is to assess how accounting manipulation can be discovered and prevented. In order to answer the problem statement, five sub-questions are presented. Hence, how one can define, perform and detect accounting manipulation, in addition to what incentives that exist and if there is possible to identify weaknesses in various control instances. Both quantitative and qualitative data, such as annual reports, court documents, and articles are secondary data used to answer the overall problem statement. In the qualitative analysis, a case study is performed to get a comprehensive understanding of how accounting manipulation is performed in practice, and to best answer the overall problem statement. The number of cases is limited to five and are all of Norwegian origin, in order for the cases to be comparable. The thesis further explains fundamental accounting principles, starting with defining accounting manipulation as when accounts are intentionally and wrongfully adjusted or misstated to portrait a picture of the financial situation of a business, that does not coincide with the reality. The different accounting standards used in the analysis is then elaborated on and compared with each other. Further, various ways of analyzing accounting data are explained, such as ratio analysis and analysis of the cash flow statement, before ways of manipulating accounting numbers are elaborated on. Lastly, the steps in the accounting quality analysis explained. Five different companies where accounting manipulation has taken place is then analyzed through the accounting quality analysis, together with an industry analysis, ratio analysis, and financial statement analysis. In the cases analyzed, three out of five were manipulated in terms of inflating revenue, by either recognizing it prematurely or fictitiously. Further, some companies capitalized fictitious values resulting in an inflated balance sheet, and thereby costs were moved to later periods. Several cases suffered from poor liquidity and decreasing margins, in addition to being dependent on external financing. These were all identified as strong incentives for performing the manipulation. At last, the thesis concludes with the accounting quality analysis being a helpful tool when identifying red flags and increased risks of manipulation. Although the framework is helpful, it does not identify accounting manipulation with certainty. Auditors, analysts, and the media are all identified as important control instances in regard to detection, and they are therefore also considered essential actors in preventing accounting manipulation. Suggestions towards how accounting manipulation can be prevented is a more extensive degree of transparency in relation to documentation and accounting choices, as well as creating a higher degree of external interest and thereby monitoring.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages134