Today’s Topics
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Revenue Frauds
Inventory Frauds
Liability Frauds
Other Asset Frauds
Disclosure Frauds
FORENSIC ACCOUNTING - BA124 – Spring 2015
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General Detection Model
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Period to period account balance
analysis
Period to period relationship analysis
Comparison with industry averages
Comparison with physical assets
General horizontal and vertical
analysis
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Revenue Frauds
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Shenanigans #1 and #2
Tables pps. 403-405
Revenue cycle
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Sell goods or services
Estimate collectibility
Returns
Write-offs
Collect cash
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Revenue Fraud Detection
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Detection
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Accounting anomilies
Ratios (p.408)
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Inventory Frauds
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Shenanigan #4
Tables pps. 416-417
Inventory cycle
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Purchase inventory
Returns
Payment
Sell inventory
Write offs
Estimate or count inventory
Value inventory
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Inventory Fraud
Detection
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Detection
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Statement of cash flows
Comparison with physical assets
Ratios (p.421)
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Liability Fraud
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Shenanigan #5
Table p. 449
Liability cycle
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Purchase goods and services
Incur accruals
Sell goods and services
Borrow money
Payments on account
Assess contingencies
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FORENSIC ACCOUNTING - BA124 – Spring 2015
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Liability Fraud Detection
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Types
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Understatement
Unearned revenue
Omission of debt and contingencies
Detection
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Accounting anomilies
Ratios (p.455)
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Other Asset Fraud
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Shenanigan #4
Chart-p. 458
Table-p. 464
Types
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Overstatement
Improper capitalization
Understated write offs
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Other Asset Fraud
Detection
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Detection
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Accounting anomilies
Ratios (pps. 465-469)
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Inadequate Disclosure
Fraud
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Misrepresentation
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Company and its products
Via financial reports
Via footnote disclosures
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Disclosure Fraud
Detection
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Detection
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KTT
Questions on pps. 473-477
Use common sense
Compare footnotes
Vigorous use of inquiries
Go outside the box!
Fraud Buster Ratio
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(NI - CFO)/Total Assets; should approach zero
Condition worsens as result grows
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Financial Fraud
Detection
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KTT is the key
Note audit related procedures C12 & C13Appendix A
Use the Fraud Exposure Rectangle
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Management & Directors
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Company relationships
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Background, motivation & influence
Obligations, related party transactions & compliance
Nature of organization & industry
Financial results & operations
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GAAP, attitude
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Shenanigan #4Expense Shifting with Assets…
Think WorldCom
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Technique #1:
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Technique #2:
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Slow amortization (somewhat subjective)-Orion Pictures
Technique #4:
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Shift of expenses to earlier period due to accounting
change-Snapple
Technique #3:
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Capitalizing normal operating costs-AOL
Failing to write-down impaired assets-Lockheed
Technique #5:
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Reducing asset reserves-Lucent
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Shenanigan #4
Red Flags
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Changes in capitalization policy preIPO
Late accounting change
announcements
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Shenanigan #5Liability Games…
Failure to record or
understatement
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Technique #1:
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Failure to record-intentional or unintentional
Technique #2:
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Reducing liabilities by changing assumptions-tax provisions
and reserves
Technique #3:
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Questionable cookie jar reserves-Chainsaw Al Dunlap and
Sunbeam Corporation
Technique #4:
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Sham rebates-rebate used to reduce COGS
Technique #5:
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Early revenue recognition versus revenue received in advance
FORENSIC ACCOUNTING - BA124 – Spring 2015
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Transparency is Key
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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, now #8
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Improved decision making
Insight into future cash flows
Resource information
FORENSIC ACCOUNTING - BA124 – Spring 2015
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