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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Brightwave Telecom's CEO is paid a bonus only if reported profit exceeds a target. The finance director notices that the CEO has pressed staff to recognise next year's contracts as current-year revenue, and the board has no independent audit committee. Which assessment is most appropriate?

The risk of management fraud through false financial reporting is high. A profit-based bonus creates incentive, premature revenue recognition shows intent, and the absence of an independent audit committee leaves weak oversight, so controls can be overridden.

  1. AManagement override and fraudulent financial reporting risk is high, because incentive, opportunity and weak oversight all existCorrect
  2. BFraud risk is low, because the CEO is senior and trustworthy by position
  3. COnly misappropriation of assets is a concern, because revenue recognition is a technical matter
  4. DThe risk is operational only and should be left to the accounts team

Explanation

A profit-linked bonus gives pressure, pushing revenue forward is the act, and the lack of an independent audit committee provides opportunity. These together signal a high risk of fraudulent financial reporting by management override. Seniority does not reduce risk and may increase it because controls can be bypassed.

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