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The following are examples of risk factors, reproduced with permission from AU-C Section 240 Appendix A, relating to misstatements arising from fraudulent financial reporting:

Incentives/Pressures

1 Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or indicated by):High degree of competition or market saturation, accompanied by declining margins.High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates.Significant declines in customer demand and increasing business failures in either the industry or overall economy.Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth.Rapid growth or unusual profitability, especially compared to that of other companies in the same industry.New accounting, statutory, or regulatory requirements.

2 Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:Profitability or trend-level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages.Need to obtain additional debt or equity financing to stay competitive—including financing of major research and development or capital expenditures.Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements.Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business combinations or contract awards.A need to achieve financial targets required in bond covenants.Pressure for management to meet the expectations of legislative or oversight bodies or to achieve political outcomes, or both.

3 Information available indicates that management’s or the board of directors’ personal financial situation is threatened by the entity’s financial performance arising from the following:Significant financial interests in the entity.Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow.5Personal guarantees of debts of the entity.

4 There is excessive pressure on management or operating personnel to meet financial targets set up by the board of directors or management, including sales or profitability incentive goals.