FDs warned against ‘wrong accounting’

The warning by forensic accountants comes weeks before the Auditing Practices Board is due to issue new guidance for auditors on ‘aggressive earnings management’. According to the board’s research ‘wrong accounting’, as the APB calls it, increases as economic pressures rise.

FDs should be on the alert to tactics used to stretch company earnings to match market expectations, which forensic accountants say is tantamount to fraud.

Adam Bates, a forensics partner at KPMG, said: ‘Managers are potentially more tempted to fudge figures as they think things will get better in the autumn. But as the black hole gets bigger, the pressure to fill it grows.’

Mark Prentice, a forensic accountant at Ernst & Young, said there was a ‘noticeable increase’ in call costs to check ‘black holes in balance sheets’ at present.

Other signs include a rise in the number of profit warnings, subsidiaries hitting targets when times are tough, delays in producing information, such as a break down of debtors, or seemingly very profitable businesses using up large amounts of cash.

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