Environmental, institutional, or individual pressures and opportune situations, which arepresent to some degree in all companies, motivate individuals and companies to engage infraudulent financial reporting

Fraud prevention and detection require that pressures andopportunities be identified and evaluated in terms of the risks they pose to a company. Adapted from the CMA Examination.

Identify two company pressures that would increase the likelihood of fraudulent financial reporting.

• Sudden deceases in revenue or market share
• Financial pressure from bonus plans that depend on short-term economic performance
• Intense pressure to meet/exceed earnings expectationsor improve reported performance
• Significant cash flow problems; unusual difficulty collecting receivables or paying payables
• Heavy losses, high or undiversified risk, high dependence on debt, or unduly restrictive debt covenants
• Heavy dependence on new or unproven product lines
• Severe inventory obsolescence or excessive inventory buildup
• Highly unfavorable economic conditions (inflation, recession)
• Litigation, especially management vs. shareholders
• Impending business failure or bankruptcy
• Problems with regulatory agencies
• Unusual spikes in interest rates
• Poor or deteriorating financial position