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Today’s Topics

Today’s Topics. Transparency Barriers Financial Fraud Overview. Barriers to Transparency. Transparency defined WYSIWYG Management bias Measurement bias. Financial Fraud Statistics. Key players COSO The Treadway Comm.-NCFFR SEC’s AAERs Accounting & Auditing Enforcement Releases

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Today’s Topics

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  1. Today’s Topics • Transparency Barriers • Financial Fraud Overview FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  2. Barriers to Transparency • Transparency defined • WYSIWYG • Management bias • Measurement bias FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  3. Financial Fraud Statistics • Key players • COSO • The Treadway Comm.-NCFFR • SEC’s AAERs • Accounting & Auditing Enforcement Releases • Treadway Commission: 1987 • Infrequent but costly • COSO Update: 1999 • 300 AAERs 1987-1997 FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  4. Drivers of 2000’s Meltdown • Booming economy • Moral decay • Incentives • Analysts’ expectations • Debt • Rules versus principles • Auditor independence issues • Greed • Educator failure • Failure to forecast FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  5. Financial Fraud Motivation • Greed • Fear of failure • Lack of accounting expertise • Scope of operations—too broad FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  6. 18 Key Tidbits • Average period: 23.7 months • Revenue frauds were #1 • Asset misstatement-spread around • Mean misstatement = $25 M • CEO involved in 72% of the cases • Last audit was unqualified in 55% of the cases • Mean assets = $532 M; revenues = $232 M • S/W and manufacturing involved in 12% of the cases • NASDAQ had 78% • 36% filed for bankruptcy • Non-existent or uninvolved audit committees • Insiders on Boards of Directors • Family relationships were common • Financial pressures were high • 56% of auditors were Big 6 • Auditors named in 30% of cases • 25% changed auditors after the fraud • Relatively few executives went to prison FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1

  7. 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 2015 Slide 15-1

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