June 23, 2025

Financial Statement Fraud: Everything You Need to Know as a Property Manager

Daniel Berlind

Executive Chairman

Modified bank statements and pay stubs are becoming increasingly common, leaving property managers anxious about how to address this issue. Consider this statistic: From 2016 to 2018, 97% of property management companies reported experiencing fraud in some capacity, with 80% encountering it 1 to 20 times, according to a Forrester study featured in a TransUnion article. Additionally, the report noted that prospective tenants submit approximately 59% of rental applications online, rather than in person.

Over the last decade, this digitization of the overall rental application process has launched new avenues for fraud. Fortunately, there are ways to arm yourself against rental application and financial statement fraud to minimize the risk. Avoiding these issues begins with learning to recognize fraud, identifying the warning signs, and utilizing the available tools and strategies to ensure your safety and that of your business.

Quick Insights

Financial statement fraud involves altering financial documents to make someone appear more financially stable than they really are.
Rental applicants commonly use fake pay stubs and bank statements to qualify for units they can’t actually afford.
Common fraud tactics include inflating income, creating fake sales, or hiding debts and liabilities.
Warning signs include incomplete applications, mismatched credit reports, and applicants trying to rush the process.
Preventing fraud begins with verifying multiple forms of identification, checking employment records directly, and reviewing rental history.
Using technology to catch document tampering can help stop fraud before it becomes bad debt.

What is Financial Statement Fraud?

Financial statement fraud is the intentional falsification of financial statements, whether via embellishment or inadvertence, to reflect a more favorable impression of a company’s or individual’s overall financial position, cash flow, and performance.

In many corporate cases, senior management commits financial statement fraud, which is often a means to an end. For example, motives may include keeping a business afloat or achieving personal gains. Regardless of the reason, document fraud almost always leads to significant issues. In the business world, it can result in enormous reputational damage, severe regulatory sanctions (i.e., the U.S. Securities and Exchange Commission (SEC), and even worse, arrests.

Regarding individual fraud, potential tenants often create fake pay stubs, hoping to impress a prospective landlord when vying for a rental unit. Numerous websites can churn out fake pay stubs in a matter of minutes. These pay stubs appear legitimate and are nearly indistinguishable from genuine pay stubs. Fraudsters can input any data they want to “qualify” for a rental, opening your property to financial and reputational risk.

Types of Financial Statement Fraud

Financial statement fraud comes in many forms, including overstated revenue or assets, or understated liabilities and expenses. It also appears in the form of bribery, kickbacks, and payroll fraud. Generally, most cases involve intentionally misrepresenting accounting so that financial data or other valuation methods make a business or individual seem more profitable. Fraudsters strategically manipulate revenue, expenses, liabilities, and assets to create the illusion of an entity in a more favorable light.

Here are some examples:

Falsely inflating revenue. When someone claims money as received before goods or services are delivered. This can be done by recording future expected sales or uncertain sales prematurely. If revenue is overstated, it creates a misleading representation of fiscal health.

Fabricated revenue and sales. Claiming the sale of goods or services that never took place, like double-counting sales, depicting fake customers, or overstating or altering legitimate customer invoices. Criminals who conduct this type of fraud may reverse the false sales at the end of the reporting period to help cover up the scam.

Playing with time. This trick involves understating revenue in one accounting period by developing a reserve that can be claimed in less robust periods. This can also include posting sales before they are made or before payment is received, reinvoicing past-due accounts, and prebilling future sales.

Inadequate disclosures. Disclosed financial statement information must be accurate and clear to not mislead recipients. When this type of fraud is committed, factors like significant events, related-party transactions, contingent liabilities, and accounting changes are often omitted from financial statements.

Altering expenses. When a company fails to fully record its expenses, thereby exaggerating net income and understating costs, it creates a false impression of the net income actually earned.

Misappropriations. Altering a financial statement to mask theft or embezzlement through double-entry bookkeeping or including fake expenses is a serious felony – it is often committed by an individual hoping to enrich themselves, as opposed to other kinds of fraud intended to inflate a company’s valuation.

Financial Statement Fraud Warning Signs

There are numerous kinds of lease application and financial statement fraud. Here are some red flags to watch for when screening prospective renters:

Incomplete information. Potential tenants who give you incomplete income or credit information or whose credit history doesn’t match their pay stubs could be scammers. To avoid headaches, ensure all applicants complete every section of your rental application. Also, always cross-check the income verification they submit with their credit report.

Credit reports don’t match. If a candidate insists on giving you a hard copy printed version of their credit report – or asks you not to run one – it’s a warning sign. If you run a credit check that doesn’t correspond with the information or printed report, move on to the next option on your list of renters.

A rushed process. It’s always a sign of a potential fraudster when they offer to pay extra, or pay in advance, to rush or skip through the steps of their approval. Scammers don’t want you to review carefully or check references, as they realize you will likely uncover evidence of falsified information.

How to Prevent Financial Statement Fraud

Based on the current rental housing environment, financial statement fraud is unlikely to slow down anytime soon. Consider these tips and tactics to prevent it from happening to you:

Always ask for multiple forms of ID, like a passport and driver’s license
Confirm employment and income information via direct contact with employers
Look into criminal history by conducting a comprehensive background check
Check previous rental references to confirm a prospective tenant’s rental history and character references
Utilize digital tenant screening platforms to quickly and easily detect any inconsistencies or red flags within applicant information.

The Bottom Line

Unfortunately, financial statement fraud can result in significant financial losses and considerable headaches for landlords and property managers. However, educating yourself on the red flags and warning signs and taking proactive steps to reduce this type of issue can help you ultimately identify ideal renters and safeguard you and your company against scammers.

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