1 / 36

Fraudulent Financial Statement Schemes

Fraudulent Financial Statement Schemes. Pop Quiz. Name at least three of the five principle financial statement fraud schemes . Financial Statement Fraud Defined. Deliberate misstatements or omissions deceive users. Specifically. Falsification, alteration, or manipulation

chavez
Download Presentation

Fraudulent Financial Statement Schemes

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Fraudulent Financial Statement Schemes

  2. Pop Quiz Name at least three of the five principle financial statement fraud schemes.

  3. Financial Statement Fraud Defined • Deliberate • misstatements or omissions • deceive users

  4. Specifically • Falsification, alteration, or manipulation • Material intentional omissions or misrepresentations • Deliberate misapplication of accounting principles, policies, and procedures • Intentional omissions of or inadequate disclosures or presentation

  5. Costs I • More than 50% of U.S. corporations are victims of fraud with losses of more than $500,000 • Investors, employees, pensioners • Enron, WorldCom, Quest,Global Crossing, and Tyco’s • What might some other fraud costs be?

  6. Costs II • Financial reporting process undermined • Integrity of auditing profession • Capital markets lose confidence • Capital markets less efficient

  7. Costs III • Economic growth and prosperity • Litigation costs • Destroys careers • Bankruptcy or substantial economic losses

  8. Costs IV • intervention • Inefficiency • Doubts re: audits • Public confidence and trust

  9. Types • Fictitious revenues • Timing differences • Improper asset valuations • Concealed liabilities and expenses • Improper disclosures

  10. Fictitious Revenues • Fake sales, customers • Legitimate customers • Conditional sales

  11. Red Flags – Fictitious Revenues • Rapid growth • unusual profitability • Negative CFO with positive NI • Related party/SPE transactions

  12. Red Flags – Fictitious Revenues • Complex transactions • ↑ number of days’ sales in receivables • Sales to unknown entities • An unusual surge in sales

  13. Timing Differences • Improper periods • Shifting revenues or expenses • Matching revenues with expenses • Premature revenue recognition • Long-term contracts • Channel stuffing

  14. Red Flags – Timing Differences • Rapid growth or unusual profitability • Negative CFO with positive NI • Complex transactions • ↑ number of days’ sales in receivables • ↓ number of days’ purchases in accounts payable

  15. Concealed Liabilities • Liability/expense omissions • Capitalized expenses • Warranties • Contingencies

  16. Red Flags – Concealed Liabilities • Negative CFO with positive NI • Significant estimates • CEO obsession with GAAP selections • Unusual ↑ in gross margin • Unusual SRA, warranty claims • ↓ the number of days’ purchases in accounts payable • Out of line with competitors

  17. Improper Disclosures • Liability omissions • Subsequent events • Management fraud • Related-party transactions • Accounting changes

  18. Red Flags – Improper Disclosures • Domination of management • Ineffective board of directors • Tone at the top • Rapid growth or unusual profitability

  19. Red Flags – Improper Disclosures • Significant, unusual, or highly complex transactions, • Significant related-party transactions • tax haven bank accounts • Overly complex organizational structure

  20. Red Flags – Improper Disclosures • Known history of violations • Materiality justifications • Limitation of auditor access

  21. Improper Asset Valuation • Inventory valuation • Accounts receivable • Business combinations • Fixed assets

  22. Red Flags – Improper Asset Valuation • negative cash flows with positive earnings. • Declining business/economy • Lots of assets based on estimates • CEO obsession on GAAP choices • Gross margin ↑ compared to industry

  23. Red Flags – Improper Asset Valuation • ↑ the number of days’ sales in receivables • ↑ number of days’ purchases in inventory • ↓Allowances for bad debts, inventory • Unusual change in the relationships • Increasing assets when competitors are reducing

  24. Detection of Fraudulent Financial Statement Schemes • SAS 99 – Consideration of Fraud in a Financial Statement Audit • “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

  25. SAS 99 • Two major types of fraud • Professional skepticism • Discussion of risk

  26. SAS 99 • Obtaining information needed to identify risks of material misstatement due to fraud • Inquiries of management • Unusual or unexpected relationships • Fraud risk factors exist. • Other information

  27. SAS 99 • Identifying risks that may result in material misstatement due to fraud • Type • Significance • Likelihood • Pervasiveness • Assessing the identified risks after taking into account an evaluation of the entity’s programs and controls • Specific controls • Broader programs

  28. SAS 99 • Responding to the results of the assessment • Overall responses • nature, timing, and extent of procedures • risk of management override of controls • Examining journal entries and other adjustments • Reviewing accounting estimates • Evaluating the business rationale

  29. SAS 99 • Evaluating audit evidence • Assessing risks of material misstatement • Evaluating analytical procedures • at or near the completion of fieldwork • misstatements that may be the result of fraud

  30. SAS 99 • Communicating about fraud to management, the audit committee, and others • even if considered inconsequential • Internal controls  management • Disclosing possible fraud to outside parties

  31. SAS 96 – Audit Documentation • list of factors • new requirements • Retains much of the ownership/record retention guidance of SAS 41 • Contains amendments adding specific documentation requirements to other SASs

  32. Financial Statement Analysis • Vertical analysis • Horizontal analysis • Ratio analysis

  33. Deterrence of Financial Statement Fraud • Reduce pressures • Reduce the opportunity • Reduce rationalization

  34. Reduce Pressures to Commit Financial Statement Fraud • “tone at the top”. • Unachievable goals. • excessive pressure. • Recognize changing market • Fair compensation systems • excessive external expectations • Remove operational obstacles blocking effective performance.

  35. Reduce the Opportunity to Commit Financial Statement Fraud • internal accounting records. • monitor the business transactions and interpersonal relationships • physical security system. • Accurate personnel records. • Strong supervisory and leadership relationships. • Clear and uniform accounting procedures

  36. Reduce Rationalization of Financial Statement Fraud • Tone @ the top. • Strong policies. • Training • Anonymous tip procedure • Communications • Walk the talk

More Related