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Today’s Topics

Today’s Topics. Revenue Frauds Inventory Frauds Liability Frauds Other Asset Frauds Disclosure Frauds. The 7 Shenanigans-Revisited. Premature recording of revenue Bogus revenue One time “recurring” gains Shifting current expenses Unrecorded liabilities Revenue shifting

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Today’s Topics

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  1. Today’s Topics • Revenue Frauds • Inventory Frauds • Liability Frauds • Other Asset Frauds • Disclosure Frauds FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-1

  2. The 7 Shenanigans-Revisited • Premature recording of revenue • Bogus revenue • One time “recurring” gains • Shifting current expenses • Unrecorded liabilities • Revenue shifting • Shifting future expenses FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-2

  3. General Detection Model • 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 2008 Slide 11-3

  4. Revenue Frauds • Shenanigans #1 and #2 • Table pps. 408-409 • Revenue cycle • Sell goods or services • Estimate collectibility • Returns • Write-offs • Collect cash FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-4

  5. Revenue Fraud Detection • Detection • Accounting anomilies • Ratios (p.410) FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-5

  6. Inventory Frauds • Shenanigan #4 • Table p. 420 • Inventory cycle • Purchase inventory • Returns • Payment • Sell inventory • Write offs • Estimate or count inventory • Value inventory FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-6

  7. Inventory Fraud Detection • Detection • Statement of cash flows • Comparison with physical assets • Ratios (p.421) FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-7

  8. Liability Fraud • Shenanigan #5 • Table p. 442 • Liability cycle • Purchase goods and services • Incur accruals • Sell goods and services • Borrow money • Payments on account • Assess contingencies FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-8

  9. Liability Fraud Detection • Types • Understatement • Unearned revenue • Omission of debt and contingencies • Detection • Accounting anomilies • Ratios (p.449) FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-9

  10. Other Asset Fraud • Shenanigan #4 • Types • Overstatement • Improper capitalization • Understated write offs FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-10

  11. Other Asset Fraud Detection • Detection • Accounting anomilies • Ratios (p.458; p.463) FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-11

  12. Inadequate Disclosure Fraud • Misrepresentation • Company and its products • Via financial reports • Via footnote disclosures FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-12

  13. Disclosure Fraud Detection • Detection • KTT • Questions on p.468 • Use common sense • Compare footnotes • Vigorous use of inquiries • Go outside the box! • Fraud Buster Ratio • (NI - CFO)/Total Assets; should approach zero • Condition worsens as result grows FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-13

  14. Financial Fraud Detection • KTT is the key • Use the Fraud Exposure Rectangle • Management & Directors • Background, motivation & influence • Company relationships • Obligations, related party transactions & compliance • Nature of organization & industry • Financial results & operations • GAAP, attitude FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-14

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