Today’s Topics
• Shenanigans 1-4
• Article Overview
• Data Driven Fraud Detection
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-1
Shenanigan Update
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Shenanigan #1
Shenanigan #2
Shenanigan #3
Shenanigan #4
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-2
Shenanigan #1
• Technique #1:
– Recording revenue when obligations remain
• Technique #2:
– Recording revenue in excess of contract value
• Technique #3:
– Recording revenue before buyer’s acceptance
• Technique #4:
– Recording revenue when payment is not assured
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-3
Revenue Red Flags
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Aggressive Rev. Rec. Policies
Rise in unbilled receivables
Rising receivables
Rising allowance for doubtful accounts
Increased returns
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-4
Earnings Manipulation Shenanigan
#2Recording Bogus Revenue
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Technique #1:
– Lack of economic substance
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Technique #2:
– Lack of arm’s length
• Related parties
• “Round-trip” transactions
• Supplier rebates
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Technique #3:
– Non-operating revenue transactions
• Investment income as operating revenue
• Loans recorded as revenue
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Technique #4:
– Recording revenue at inflated amounts
• Priceline.com
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Technique #5:
– Post merger deferred revenue
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-5
Shenanigan #3-
Boosting (Operating) Income
• Technique #1:
– Boosting income using one-time events
• Selling of undervalued assets
• Technique #2:
– Boosting income through misleading classifications
• Including investment gains in ops. income
• Reducing opex by investment gains
• Reclassifying balance sheet accounts
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-6
Shenanigan #3 Warning Signs
• Turning sales proceeds into recurring
income
• Shifting operating expenses
• Recurring “restructuring” costs
• Influence misinterpretation impact on
income statement
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-7
Shenanigan #4-
Expense Shifting with Assets…
Think WorldCom
• Technique #1:
– Capitalizing normal operating costs-AOL
• Technique #2:
– Slow amortization/depreciation (somewhat subjective)-Time
Warner Telecom
• Technique #3:
– Failing to write-down impaired assets-Coldwater Creek
• Technique #4:
– Reducing asset reserves-Vitesse
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-8
Shenanigan #4
Red Flags
• Changes in capitalization policy pre-IPO
• Late accounting change announcements
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-9
Transparency is Key
• Are the #s telling the story or making the
story?
• Is the company managing the business
or managing the #s?
• What is, is? versus What is. Is!
• Recall SFAC #1
– Improved decision making
– Insight into future cash flows
– Resource information
FORENSIC ACCOUNTING - BA124 –
Spring 2015
5-10
Article Overview
• “Fakin’ It”….Fraud inside the fraud at Enron
• “Fraud Prevention Education…”…SJSU is
ahead of the curve
• “No Free Pass”…revised interest in enforcing
FCPA
• “Fraud Finds…”…SOX has helped the
assessment of fraud
• “Oddsmakers…”…finding fraud on the field
FORENSIC ACCOUNTING - BA124 –
Spring 2015
6-11
Data Analysis & Fraud
Detection
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Data
Data
Data
Data
Analysis Process
Analysis Software
Access Challenges
Analysis Techniques
FORENSIC ACCOUNTING - BA124 – Spring 2015
12
Data Analysis Process
Understand the business
Brainstorm frauds
Identify fraud symptoms
Use technology to collect symptom
data
• Analyze the data
• Investigate selected symptoms
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FORENSIC ACCOUNTING - BA124 – Spring 2015
13
Data Analysis Software
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ACL
CaseWare
Picalo
Microsoft + Active Data
FORENSIC ACCOUNTING - BA124 – Spring 2015
14
Data Access Challenges
and Tools
• Open database connectivity (ODBC)
• Text importing-extensible markup
language (XML)
• Data warehousing
FORENSIC ACCOUNTING - BA124 – Spring 2015
15
Data Analysis
Techniques
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Benford’s Law
Time trends
Fuzzy matching
Matosas and real time analysis
FORENSIC ACCOUNTING - BA124 – Spring 2015
16
Benford’s Law
• Occurrence of digits in a random
number sequence
• Series starting with 1’s greater than
2’s; 2’s greater than 3’s, etc.
• Effective for locating falsified trends
FORENSIC ACCOUNTING - BA124 – Spring 2015
17
Financial Statement
Analysis
• Methodology
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Trends
Ratios
Horizontal analysis
Vertical analysis
• What looks out of the ordinary
FORENSIC ACCOUNTING - BA124 – Spring 2015
18