Upfront: "Financial Statement Fraud: Prevention and Detection"

Prevention, detection and correction are the watchwords for the finance executives of companies at which financial reports are under increased scrutiny in the wake of the Enron debacle. Corporate management teams, of course, are responsible for preventing fraud and for designing an effective internal control structure that enables them to detect and correct fraudulent reporting.

But spotting danger early is a bigger challenge now than it was in the past, when business models were less complex and accounting rules fewer and less obtuse. Thus, CFOs can benefit from publications that assess the consequences of financial statement fraud and its impact on the integrity of the reporting process. "Financial Statement Fraud: Prevention and Detection" by Zabihollah Rezaee (John Wiley & Sons, 2002) is such a resource.

If you think there is no danger of fraud in your organization, this book might lead you to think again. Rezaee does an excellent job of describing the environmental factors that can lead to fraud, and the picture looks disturbingly familiar to many executives. "Companies may engage in financial statement fraud when the right combination of motive, opportunity and rationalization exists. For example, management with strong motivation and provided opportunity may justify its aggressive earnings management attitude by stating that meeting financial analysts' forecasts is in the best interest of investors in the sense that it creates shareholder value," says Rezaee. Incentive plans designed to enhance shareholder value often motivate management to explore profit opportunities by operating as close as possible to the borderline between legality and illegality. For a variety of reasons, individual managers or management groups may cross the line, especially when that boundary is ill-defined, when the perceived benefits outweigh the probable costs, when there is pressure to show more favorable performance and financial results, or when the corporate management culture embraces the challenges of living dangerously.