Financial Statement Fraud
R
iti P
i i l
Revenue R
Recognition
Principles
Revenue recognized when
„
„
Earnings process is complete
Exchange has occurred
Rights of ownership (any of the following)
„
„
„
„
„
„
Possession of an unrestricted right of use
Title
Assumption of liability
Transferability of ownership
Insurance coverage
Risk of loss
Financial Statement Fraud
S
h
Cl
ifi ti
Scheme
Classifications
Fictitious Revenues
Timing Differences
Concealed Liabilities and Expenses
Improper Disclosures
Improper Asset Valuations
Fi
titi
R
Fictitious
Revenues
Fabricating Revenue
„
„
„
Management uses own funds to create illusory
sales
l
Fictitious products
Shipping products without customer obligation to
pay
Inadequate
q
provisions
p
to sales & returns
Sales with conditions
Ti
i Diff
Timing
Differences
Early revenue recognition
„
„
„
Recording
g revenues when services are still
due
Shipping before sale is finalized
Holding books open
Ti
i Diff
(
t’d)
Timing
Differences (cont’d)
Delayed expense recognition
„
„
Capitalizing
p
g revenue expenditures
p
Depreciating/amortizing too slowly
Premature expense recognition
„
„
„
Accelerating expenses into current period
Writing off future years
years’ depr/amort.
depr/amort
Expensing capital expenditures
C
l d Li
biliti & Expenses
E
Concealed
Liabilities
Liability/Expense Omission
Omission of warranty and product
liability
Li
bilit /E
O i i
Liability/Expense
Omission
Failing to record liabilities
Reporting revenue rather than a liability
when cash is received
Failing to record contingencies
Omission of Warranty and
P
d t Li
bilit
Product
Liability
Failing to record warranty costs in
period in which revenue is recognized
Failing to record liability arising from
product
p
oduct defects
de ects
IImproper Di
l
Disclosures
Liability omissions
„
Loan covenant and default omissions
Significant events
„
Product recalls
Management fraud
R l t d
Related-party
t ttransactions
ti
Changes in accounting policy
IImproper A
l ti
Assett V
Valuation
Inventory
Accounts receivable
Fixed assets
Business combinations
IInventory
t
V
l ti
Valuation
Improper estimates of obsolete
inventory
Manipulation of physical count
Fictitious inventory
Failing to record purchase of inventory
I
Improper
iinventory capitalization
i li i
A
t R
i bl Valuation
V l ti
Accounts
Receivable
Fictitious receivables
Failure to write down A/R for bad debts
Fi
dA
t V
l ti
Fixed
Assets
Valuation
Booking fictitious fixed assets
Misrepresenting asset value
Improper capitalization
Misclassification of assets
B
i
C
bi ti V
l ti
Business
Combination
Valuation
Overstatement of value of assets
acquired
Overstatement of income from acquiree