Financial Statement Fraud – Strategies for Detection and Investigation

<p>Foreword xiii</p>
<p>Preface xvii</p>
<p>Acknowledgments xxi</p>
<p>PART I REVENUE–BASED SCHEMES 1</p>
<p>Chapter 1 Introduction to Revenue–Based Financial Reporting Fraud Schemes 3</p>
<p>Revenue Recognition Principles 3</p>
<p>Changes Proposed by FASB and IASB 5</p>
<p>Overview of Revenue–Based Schemes 6</p>
<p>Chapter 2 Timing Schemes 9</p>
<p>Alteration of Records 9</p>
<p>Shipping Schemes 10</p>
<p>Percentage of Completion Schemes 12</p>
<p>Improper Estimates of Revenue Recognition Period 15</p>
<p>Multiple–Element Revenue Recognition Schemes 17</p>
<p>Customer Loyalty Programs 22</p>
<p>Channel Stuffing 24</p>
<p>Bill and Hold Schemes 27</p>
<p>Sales with Right of Return 29</p>
<p>Improper Pushing of Current Revenue to Future Periods 30</p>
<p>Use of Reserves as a Rainy Day Fund 32</p>
<p>Chapter 3 Fictitious and Inflated Revenue 33</p>
<p>Fictitious Revenue Schemes 33</p>
<p>Sales to Related Parties 37</p>
<p>Infl ated Revenue Schemes 41</p>
<p>Consignment or Financing Arrangements 43</p>
<p>Chapter 4 Misclassification Schemes 47</p>
<p>Recording Financing Arrangements as Revenue 47</p>
<p>One–Time Credits Reported as Revenue 49</p>
<p>Sales Incentive Schemes 50</p>
<p>Chapter 5 Gross–Up Schemes 57</p>
<p>Agent versus Principal 58</p>
<p>Barter and Round–Trip Transactions 59</p>
<p>Phony Revenue and Expenses 61</p>
<p>PART II ASSET–BASED SCHEMES 63</p>
<p>Chapter 6 Improper Capitalization of Costs 65</p>
<p>Start–Up Costs 66</p>
<p>Research and Development Costs 67</p>
<p>Property and Equipment 68</p>
<p>Software Development and Acquisition Costs 71</p>
<p>Website Costs 73</p>
<p>Intangible Assets 75</p>
<p>Advertising Costs 77</p>
<p>Other Deferrals and Prepaid Expenses 79</p>
<p>Inventory Capitalization Schemes 80</p>
<p>Inventory Flow Assumptions 81</p>
<p>Chapter 7 Asset Valuation Schemes 85</p>
<p>Fictitious Assets 85</p>
<p>Inventory Valuation Schemes 86</p>
<p>Inflating the Basis of Property and Equipment 88</p>
<p>Inflating the Basis of Assets Acquired in Noncash Transactions 89</p>
<p>Assets Acquired from Related Parties 92</p>
<p>Understating Depreciation and Amortization Expense 93</p>
<p>Investment Property 95</p>
<p>Improper Valuation of Investments Financial Assets 96</p>
<p>Loans 104</p>
<p>Equity Method Investments 108</p>
<p>Proportionate Consolidation 109</p>
<p>Improper Classification or Amortization of Intangible Assets 111</p>
<p>Impairment Losses Nonfinancial Assets 112</p>
<p>Investments in Insurance Contracts 115</p>
<p>Chapter 8 Fair Value Accounting 117</p>
<p>Fair Value Considerations 117</p>
<p>Methods of Measuring Fair Value 118</p>
<p>Internal versus Externally Developed Valuations 124</p>
<p>Inputs Used in Measuring Fair Value 127</p>
<p>PART III EXPENSE AND LIABILITY SCHEMES 129</p>
<p>Chapter 9 Shifting Expenses to Future Periods 131</p>
<p>Timing Schemes Involving Liabilities 131</p>
<p>Accounts Payable 131</p>
<p>Compensated Absences 132</p>
<p>Contingent Liabilities 133</p>
<p>Accrued Compensation 137</p>
<p>Improper Use of Liability Reserves 138</p>
<p>Chapter 10 Omissions and Underreporting of Liabilities 141</p>
<p>Debt 141</p>
<p>Guarantees 146</p>
<p>Pension Liabilities 149</p>
<p>Conditional Asset Retirement Obligations 152</p>
<p>PART IV OTHER FINANCIAL REPORTING SCHEMES 155</p>
<p>Chapter 11 Consolidations and Business Combinations 157</p>
<p>Fraudulent Reporting Involving Consolidations 157</p>
<p>Business Combinations 164</p>
<p>Chapter 12 Financial Reporting Fraud as a Concealment Tool 171</p>
<p>Financial Statement Fraud to Conceal Asset Misappropriations 171</p>
<p>Financial Statement Fraud to Conceal Illegal Acts 174</p>
<p>Chapter 13 Financial Statement Fraud by Not–for–Profit Organizations 177</p>
<p>Inflating the Value of Non–Cash Contributions 179</p>
<p>Improperly Reporting Contributions Raised for Others 179</p>
<p>Netting the Results of Fund–Raising Events 180</p>
<p>Improper Allocation of Costs Associated with Joint Activities 182</p>
<p>Misclassification of Expenses 185</p>
<p>Chapter 14 Disclosure Fraud 187</p>
<p>Categories of Disclosure Fraud 189</p>
<p>Common Disclosure Risks 189</p>
<p>PART V DETECTION AND INVESTIGATION 197</p>
<p>Chapter 15 Detecting Financial Statement Fraud 199</p>
<p>Motives for Financial Statement Fraud 200</p>
<p>Fraud Risk Indicators 202</p>
<p>Internal Control Indicators 202</p>
<p>Chapter 16 Financial Statement Analysis 209</p>
<p>Use of Analytical Techniques to Detect Fraud 209</p>
<p>Horizontal Analysis 210</p>
<p>Vertical Analysis 211</p>
<p>Budget Variance Analysis 212</p>
<p>Chapter 17 Ratio Analysis 215</p>
<p>Research on Ratio Analysis 216</p>
<p>Use of Operating Ratio Analysis to Detect Financial Statement Fraud 217</p>
<p>Another Useful Measure: Working Capital to Total Assets 225</p>
<p>Chapter 18 Other Detection Procedures 227</p>
<p>Analysis Utilizing Multiple Ratios 227</p>
<p>Ratios Involving Nonfinancial Data 231</p>
<p>Other Information and Disclosures in Financial Statements 232</p>
<p>Understandability of Financial Statement Disclosures 234</p>
<p>Testing of Journal Entries 235</p>
<p>Chapter 19 Fraud or Honest Mistake? 239</p>
<p>The Smoking Gun 240</p>
<p>Witnesses 240</p>
<p>Altered Documents 241</p>
<p>Multiple Records 242</p>
<p>Destruction of Evidence 242</p>
<p>Actions That Contradict Recommendations 243</p>
<p>Patterns of Behavior 244</p>
<p>Personal Gain 244</p>
<p>There s No Other Explanation for It 244</p>
<p>Chapter 20 Assessing (or Minimizing) Auditor Liability 245</p>
<p>Litigation against Auditors 246</p>
<p>Concealment from the Auditors 247</p>
<p>Auditing Standards 248</p>
<p>Consideration of the Risks of Material Misstatement 249</p>
<p>Improper or Inadequate Use of Analytical Procedures 254</p>
<p>Auditing Accounting Estimates and Fair Values 257</p>
<p>Revenue Recognition Risks 263</p>
<p>Insufficient Consideration of Related Party Transactions 266</p>
<p>Auditing Disclosures in the Financial Statements 266</p>
<p>Overreliance on the Management Representation Letter 267</p>
<p>Appendix: Financial Statement Fraud Indicators 269</p>
<p>Bibliography 275</p>
<p>About the Author 277</p>
<p>About the Website 279</p>
<p>Index 281</p>
<p>Index to Cases 287</p>