Advertisement
1 / 79

Financial Statement Analysis:  Key to Identifying Fraud


Financial Statement Analysis:  Key to Identifying Fraud. Breakout Session # 803 Juanita M. Rendon, MBA, CPA April 7, 2009 11:00 AM – 12:30 PM. Learning Objectives. Understand general fraud concepts. Understand basic financial statements and ratio analysis.

Presentation posted in : General

Download Presentation

Financial Statement Analysis:  Key to Identifying Fraud

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 sites. SlideServe reserves the right to change this policy at anytime.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.











- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -




Presentation Transcript


Financial statement analysis key to identifying fraud l.jpg

Financial Statement Analysis: Key to Identifying Fraud

Breakout Session # 803

Juanita M. Rendon, MBA, CPA

April 7, 2009

11:00 AM – 12:30 PM


Slide3 l.jpg

Learning Objectives

  • Understand general fraud concepts.

  • Understand basic financial statements and ratio analysis.

  • Understand the usefulness of ratio analysis as a tool in identifying potential fraud.


Slide4 l.jpg

Overview

  • Fraud

    • Common Thread in Definitions

    • Types of Fraud

    • Fraud Triangle/Fraud Diamond

    • Incentives To Commit Financial Statement

      • Fraud

    • Financial Statement Fraud Issues

  • Basic Financial Statements

    • Standard Setting

    • Components of Financial Statements

  • Ratio Analysis

    • Categories of Financial Ratios

    • Ratio Analysis Usefulness as a Tool


Why is this important l.jpg

WHY IS THIS IMPORTANT?

  • Fraudulent Activities Cost Billions of Dollars!

  • Contracting Managers Need To Be aware Of Potential Fraud.


Slide6 l.jpg

ACFE 2008 Report To The Nation

On Occupational Fraud and Abuse

Study was based on 959 cases of fraud investigations by CFEs between Jan. 2006 & Feb. 2008

(ACFE, 2008)


Slide7 l.jpg

ACFE 2008 Report To The Nation

On Occupational Fraud and Abuse

(ACFE, 2008)


Fraud definition l.jpg

Fraud Definition

Dictionary definition:

  • noun

    • deceit; trickery; cheating

    • LAW:intentional deception to cause a person to give up property or some lawful right

  • a person who deceives, is an impostor or a cheat

http://www.yourdictionary.com/fraud


Acfe fraud definition l.jpg

ACFE Fraud Definition

  • Occupational fraud and abuse may be defined as: "The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets."

    (Wells, Joseph T., 2008; ACFE, 2006)


Slide10 l.jpg

DOD Fraud Definition

  • DOD defines fraud as follows:

    • Fraud is any intentional deception taken for the purpose of inducing DOD action or reliance on that deception. Fraud can be perpetrated by DOD personnel—whether civilian or military—or by contractors and their employees.

(GAO,2006, June 19, Contract Management: DOD Vulnerabilities to

Contracting Fraud, Waste, and Abuse, )


Irs fraud definition l.jpg

IRS Fraud Definition

  • Fraudis deception by misrepresentation of material facts,… resulting in material damage to one who relies on it and has the right to rely on it…

  • Tax fraud is often defined as an intentional wrongdoing on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing.

    Tax fraud requires both:

    • An underpayment; and

    • A fraudulent intent.

(Internal Revenue Service, Internal Revenue Manual 25.1.1.2 (05-19-1999))


Slide12 l.jpg

GOVERNMENT

PROCUREMENT

FRAUD

(Purchase Cards)

TAX

FRAUD

(Federal Income Tax)

MORTGAGE

FRAUD

(Sub-prime Loans)

TYPES

OF

FRAUD

EMPLOYEE

FRAUD

(Payroll Fraud)

FINANCIAL

STATEMENT

FRAUD

(Enron, WorldCom)

CONSUMER

FRAUD

(Identity Theft)

COMPUTER

INTERNETFRAUD

(Cyber Theft)

HEALTHCARE

FRAUD

(Medicare Fraud)


The fraud triangle l.jpg

The Fraud Triangle

  • Criminologist Donald R. Cressey (1919-1987)

    • While researching his doctoral dissertation in the 1950s, developed a hypothesis to explain why people commit fraud.

    • Published “Other People’s Money: A Study in the

      Social Psychology of Embezzlers”

  • Dr. Cressey interviewed 200 inmates at prisons in the Midwest

  • Three key elements:

    • Incentive/Motivation/Pressure

    • Opportunity

    • Rationalization

(Wells, Joseph T., 2008)


Slide15 l.jpg

  • Capability Traits:

  • Position/Function

    • Authority

    • Influence

  • Brains

    • Knowledge

  • Coercion Skills

  • Confidence/ego

  • Effective Lying

(Wolfe, David T.,& Hermanson, Dana R., 2004, December)


Slide16 l.jpg

Understated

Liabilities/Expenses

Overstated

Assets/Income

Fictitious

Revenue/

Accounts

Receivable

Fraudulent

Financial

Statement

Issues

Inventory/

Cost of Goods Sold

Timing Or

Classification

Issues

Disclosure/

Lack Of

Transparency

Improper

Asset

Valuation

Other


Slide17 l.jpg

Overview of Financial Statements

Most businesses prepare :

  • 1.Income Statement

  • 2.Balance Sheet

  • Statement of Cash Flows

  • Statement of Stockholders’ Equity

  • Statement of Retained Earnings

In the U. S., financial statements are based on

Generally Accepted Accounting Principles (GAAP).

(Albright & Ingram, 2006)


Slide18 l.jpg

Overview of Financial Statements

Standard Setting Organizations

The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) oversee the publically tradedcompanies.

The Financial Accounting Standards Board (FASB) (American Institute of Certified Public Accountants -- AICPA) oversees the privatecompanies.

(Albright & Ingram, 2006)


Slide19 l.jpg

Standard Setting Organizations

The Governmental Accounting Standards Board (GASB)sets accounting standards for state & localgovernments

The U. S. Government Accountability Office (GAO) oversees accounting in the federal government.

The International AccountingStandards Board (IASB) is an independent, privately-funded board interested in global accounting standards(International Financial Reporting Standards).

(Albright & Ingram, 2006)


Slide20 l.jpg

Overview of Financial Statements

Sources of Accounting Regulations

The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. This act affected the responsibilities of auditors, boards of directors, and corporate managers with respect to financial reporting. The primary purpose was to increase investor confidence.

(Albright & Ingram, 2006)


Slide21 l.jpg

The Auditors’ Report

Auditing standards include procedures used in conducting an audit to help auditors form an opinion about the fairness of the audited statements. (GAAS: Generally Accepted Auditing Standards). For the federal government, the Generally Accepted Government Auditing Standards (GAGAS) are used.

(Albright & Ingram, 2006)


Slide22 l.jpg

Overview of Financial Statements

The Income Statement (Statement of Earnings) reports revenues and expenses for an accounting period.

(Albright & Ingram, 2006)


Slide23 l.jpg

ABC Company, Inc.

Income Statement

For the Year Ended December 31, 2008

Sales revenue$700,500

Cost of goods sold (450,200)

Gross profit250,300

Depreciation Expense (60,000)

Selling, general, & administrative exp. (90,300)

Operating income100,000

Interest expense (5,000)

Pretax income95,000

Income taxes (40% tax rate) (38,000)

Net income$ 57,000


Slide24 l.jpg

Overview of Financial Statements

A Balance Sheet (Statement of Financial Condition) identifies a company’s assets and claims to those assets by creditors and ownersat a specific date.

(A = L + SE) (a snapshot)


Slide25 l.jpg

ABC Company, Inc.

Balance Sheet

At December 31, 2008

Assets

Current assets:

Cash$ 12,600

Accounts receivable9,600

Merchandise inventory22,000

Supplies800

Prepaid rent 1,000

Total Current Assets$ 46,000

Long-term (Fixed) Assets:

Property and equipment, at cost300,000

Less Accumulated depreciation (60,000)

Total Long-term (Fixed) Assets $240,000

Total Assets$286,000

Continued


Slide26 l.jpg

Liabilities and Stockholders’ Equity:

Current Liabilities:

Accounts payable$ 8,500

Unearned revenue3,800

Interest payable700

Notes payable, current portion 4,000

Total Current Liabilities $ 17,000

Long-term liabilities:

Notes payable, long-term 80,000

Total Liabilities$ 97,000

Stockholders’ equity:

Common stock150,000

Retained earnings 39,000

Total Stockholders’ Equity $189,000

Total Liabilities and Stockholders’ Equity$286,000


Slide27 l.jpg

Must Equal

ABC Company, Inc.

Balance Sheet

At December 31, 2008

Assets:

Total assets$286,000

Liabilities and Stockholders’ Equity

Total Liabilities and Stockholders’ Equity $286,000


Slide28 l.jpg

Assets

Stock-holders’ Equity

Liabilities

=

+

Economic Resources Owned by a Business

The Financial Obligations or Debts of a Business

Owners’ Claims on the Assets of a Business

The Basic Accounting Equation

(Albright & Ingram, 2006)


Slide29 l.jpg

Overview of Financial Statements

The Statement of Cash Flows reports events that affected a company’s cash account during a fiscal period; has three sections: operating, investing, & financing.

(Albright & Ingram, 2006)


Slide30 l.jpg

The Statement of Cash Flows

Operating activities involve the buying or producing and the sale & distribution of goods and services to customers related to cash.

Investing activities involve the buying and selling of long-term assets.

Financing activities involve transactions between a company and its owners or creditors.

(Albright & Ingram, 2006)


Slide31 l.jpg

The Statement of Cash Flows

GAAP permits the statement to be presented in either of two formats: direct or indirect.

GAAP requires a schedule to reconcile cash flows from operating activities with net income if the direct format is used.

The differences between formats are in the operating section only. 99% of companies use the indirect method.

(Albright & Ingram, 2006)


Slide32 l.jpg

From the income statement

ABC Company, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2008

Indirect

Operating Activities

Net income$ 57,000

Depreciation exp. (noncash)60,000

Increase in accounts receivable (CA)(20,000)

Increase in merchandise inventory (CA)(32,000)

Increase in supplies (CA)(1,200)

Increase in prepaid rent (CA)(5,000)

Increase in accounts payable (CL)6,600

Increase in unearned revenue (CL)3,000

Increase in interest payable (CL) 400

Net cash flow from operating activities $ 68,800


Slide33 l.jpg

Carried forward $ 68,800

Investing Activities

Payments for purchase of equipment(231,700)Receipts from sale of equipment 500

Net cash flow for investing activities(231,200)

Financing Activities

Receipts from sale of common stock150,000

Payment of dividends(20,000)

Receipts from borrowing60,000

Repayment of debt (15,000)

Net cash flow from financing activities 175,000

Net increase in cash12,600

Cash balance, December 31, 2007 0

Cash balance, December 31, 2008$ 12,600


Slide34 l.jpg

Statement of Stockholders’ Equity

Statement of Stockholders’ Equity

CCRETotal

Balance at Jan. 1, 2008$ 0 $ 2,000 $ 2,000

+ Common Stock Issued 150,000 150,000

+ Net Income 57,000 57,000

- Dividends ______ <20,000><20,000>

= Balance at Dec.31, 2008 $150,000 $39,000 $ 189,000

This statement links the income statement

to the balance sheet. It describes how much

Net Income was reinvested as part of RE.

(Albright & Ingram, 2006)


Slide35 l.jpg

Statement of Retained Earnings

This shows the amount of Net earnings (NI) retained by the company and the dividends

distributed to shareholders. RE is part of the B/S.

(Albright & Ingram, 2006)

ABC Company, Inc.Statement of Retained EarningsFor the Year Ended December 31, 2008

  • Retained Earnings, Jan. 1, 2008 $ 2,000

  • Net income for 2008 57,000

  • Less: Dividends (Pmt. to Stkhldrs) (20,000) 37,000

  • Retained Earnings, Dec. 31, 2008 $39,000


Title of slide l.jpg

Overview of Financial Statements

Title of Slide


Slide37 l.jpg

Financial Statement Analysis Methods

(Brigham & Houston, 2007)

  • Vertical Analysis: involves measuring relationships between items for a single year. For example, % of sales on an income statement; % of total assets & % of total Liabilities & Stockholders’ Equity on a balance sheet

  • Horizontal Analysis: involves calculating the Dollar change and the Percent change for each line item on the Income Statement or Balance Sheet from the previous year to the current year.

    Current year – Previous year/Previous year x 100 = % change

  • Ratio Analysis:Various ratios


Why are ratios useful l.jpg

Why are ratios useful?

(Brigham & Houston, 2007)

  • Ratios can standardize numbers and facilitate comparisons.

  • Ratios can be used to highlight weaknesses and strengths.

  • Ratio comparisons should be over a period of time and with competitors in the same industry

    • Trend analysis

    • Industry analysis


Slide39 l.jpg

Five Major Categories Of Ratios

(Brigham & Houston, 2007)

Liquidity (Solvency): Can the company meet its short-term obligations?

Asset management (Operating Efficiency): Is the company using its assets to generate sales?

Debt Management: Does the company have the right mix of debt and equity? Is the company highly leveraged?

Profitability: Is the company consistently making a profit? Is the company managing its expenses?

Market Value: Do investors like what they see?


Slide40 l.jpg

Five Major Categories Of Ratios

Prepared by Juanita M. Rendon, CPA


Slide41 l.jpg

2008

100,800

900,800

2,148,800

3,150,400

1,800,000

- 899,400

900,600

4,051,000

2007

8,000

630,000

1,300,000

1,938,000

1,300,900

- 400,000

900,900

2,838,900

TYL, Inc.: Balance Sheet

(Brigham & Houston, 2007)

Cash

Accts. Receivable

Inventories

Total Current Assets

Gross L-T Assets

Less: Acc. Depreciation

Net L-T Assets

Total Assets


Liabilities and equity l.jpg

2008

430,700

250,000

450,000

1,130,700

500,000

1,630,700

2,084,574

335,726

2,420,300

4,051,000

2007

530,100

600,800

490,000

1,620,900

800,000

2,420,900

387,500

30,500 418,000

2,838,900

Liabilities and Equity:

(Brigham & Houston, 2007)

Accts. payable

Notes payable, current

Unearned Revenue

Total Current Liab.

Long-term debt

Total Liabilities:

Stockholders’ Equity:

Common stock

Retained earnings

Total Stkhldrs Equity

Total Liab. & Equity


Slide43 l.jpg

TYL, Inc.: Income Statement

2008

7,000,600

(5,800,990)

1,199,610

(500,000)

699,610

(110,900)

588,710

( 80,000)

508,710

( 203,484)

305,226

2007

4,500,000

(3,500,000)

1,000,000

( 500,900)

499,100

( 100,900)

398,200

( 130,000)

268,200

(107,280)

160,920

(Brigham & Houston, 2007)

Sales

COGS

Gross Profit (GM)

Other expenses

EBITDA

Depr. & Amort.

EBIT

Interest Exp.

Earnings Before Taxes

Taxes (40% tax rate)

Net income


Slide44 l.jpg

2008

150,000

$2.035

$12.57

2007

100,000

$1.609

$8.85

TYL, Inc.: Other data

(Brigham & Houston, 2007)

No. of shares

EPS

Stock price


Tyl inc s forecasted current ratio and quick ratio for 2008 l.jpg

Financial Analysis: Liquidity Ratios

TYL Inc.’s forecasted current ratio and quick ratio for 2008:

(Brigham & Houston, 2007;

Fraser & Ormiston, 2010)

Current ratio = Current assets / Current liabilities

= $3,150,400 / $1,130,700

= 2.79x

Quick ratio = (CA – Inventories) / CL

= ($3,150,400 – $2,148,800) / $1,130,700

= 1,001,600/1,130,700

= 0.89x


Comments on liquidity ratios l.jpg

Financial Analysis: Liquidity Ratios

Comments on liquidity ratios

  • Measure short-run solvency—the ability of a co. to meet its short-term debt requirements as they come due.

  • For 2008, Co. had $2.79 of CA for $1 of CL; For 2008, Co. has $ .89 of cash & near cash assets for every $1 of CL.

  • Below industry average; Liquidity position is weak.

  • The higher the liquidity ratios, the better.

(Brigham & Houston, 2007;

Fraser & Ormiston, 2010)


The inventory turnover vs the industry average 2008 l.jpg

Financial Analysis: Asset Management Ratios

The inventory turnover vs. the industry average: (2008)

Inv. turnover = Sales / Inventories

= $7,000,600/$2,148,800

= 3.26x = 3.3x

(Brigham & Houston, 2007)


What is the inventory turnover vs the industry average l.jpg

Financial Analysis: Asset Management Ratios

What is the inventory turnover vs. the industry average?

  • Indicates the number of times a company sells its average inventory level during the year.

  • Inventory turnover is below industry average.

  • The company might have old inventory, or its control might be poor.

  • A higher inventory turnover is usually better.

(Brigham & Houston, 2007)


Slide49 l.jpg

Financial Analysis: Asset Management Ratios

(Days Sales Outstanding) DSO is the average number of days after making a sale before receiving cash. (2008)

(Brigham & Houston, 2007)

DSO= Accounts Receivable / Avg sales per day

= Accounts Receivable / (Annual sales/365)

= $900,800 / ($7,000,600/365)

= $900,800/19,179.73

= 47.0 days


Analysis of days sales outstanding l.jpg

Financial Analysis: Asset Management Ratios

Analysis of Days Sales Outstanding

  • Measures the number of days between the sale date and the cash collection date.

  • The company is below industry average; it collects on sales on account (A/R) too slowly

  • It appears to have a poor credit policy.

  • A lower DSO is usually better.

(Brigham & Houston, 2007)


Fixed assets fa and total assets ta turnover ratios vs the industry average 2008 l.jpg

Financial Analysis: Asset Management Ratios

Fixed assets (FA) and total assets (TA) turnover ratios vs. the industry average (2008)

(Brigham & Houston, 2007)

FA turnover= Sales / Net fixed assets

= $7,000,600/$900,600 = 7.8x

TA turnover= Sales / Total assets

= $7,000,600/$4,051,000 = 1.7x


Evaluating the fixed long term asset turnover and total asset turnover ratios l.jpg

Financial Analysis: Asset Management Ratios

Evaluating the Fixed (Long-term) Asset Turnover and Total Asset Turnover Ratios:

  • Measure efficiency; Show how many sales $ a co. can generate from each $1 of its assets.

  • In 2008, FA turnover is below the industry avg.

  • TA turnover is below the industry average. May be caused by excessive currents assets (A/R and Inventory).

(Brigham & Houston, 2007)


The debt ratio d a and times interest earned tie ratios 2008 l.jpg

Financial Analysis: Debt Management Ratios

The debt ratio (D/A) and times-interest-earned (TIE) ratios. (2008)

(Brigham & Houston, 2007)

Debt ratio= Total debt / Total assets

= ($1,130,700 + $500,000/$4,051,000

= 1,630,700/4,051,000

= 40.3%

TIE= EBIT / Interest expense

= $588,710/$80,000 = 7.4x


How do the debt management ratios compare with industry l.jpg

Financial Analysis: Debt Management Ratios

How do the debt management ratios compare with industry?

  • Debt to Asset Ratio (debt ratio) shows the % of each $1 of assets that is financed with debt.

  • Times Interest Earned (TIE) ratio measures a company’s ability to pay the interest on its debt. For 2008, the co. has available $7.40 of earnings before interest and taxes for each $1 of interest it must pay to its creditors.

(Brigham & Houston, 2007)


How do the debt management ratios compare with industry55 l.jpg

Financial Analysis: Debt Management Ratios

How do the debt management ratios compare with industry?

  • D/A and TIE for 2008 are worse than the industry average,

  • A lower debt ratio (D/A) is usually better.

  • A higher TIE is better.

(Brigham & Houston, 2007)


Profitability ratios net profit margin npm 2008 l.jpg

Financial Analysis: Profitability Ratios

Profitability ratios: Net Profit margin (NPM) (2008)

(Brigham & Houston, 2007)

Net Profit margin= Net income / Sales

= $305,226/$7,000,600 = 4.4%


Analyzing profitability with the net profit margin l.jpg

Financial Analysis: Profitability Ratios

Analyzing profitability with the net profit margin

  • NPM represents the company’s ability to translate sales dollars into profits; a higher NPM is better.

  • Net Profit margin was below the industry average in 2006 and 2007, but is exceeded the industry average in 2008.

(Brigham & Houston, 2007)


Profitability ratios return on assets and return on equity 2008 l.jpg

Financial Analysis: Profitability Ratios

Profitability ratios: Return on assets and Return on equity(2008)

(Brigham & Houston, 2007)

ROA= Net income / Total assets

= $305,226/$4,501,000 = 7.5%

ROE= Net income / Total Stkhlders equity

= $305,226 / $2,420,300 = 12.6%


Analyzing profitability with the return on assets return on equity l.jpg

Financial Analysis: Profitability Ratios

Analyzing profitability with the return on assets & return on equity

  • ROA shows how much profit a co. is able to earn from each $1 of its assets. For 2008, the co. is earning 7.5 cents for each $1 of assets.

  • ROE shows how many cents are earned on each $1 of stockholders’ investment. For 2008, the co. is earning 12.6 cents for each $1 of its owners’ investment (equity).

  • Both ratios are below the industry average.

(Brigham & Houston, 2007)


Analysis of sales growth index l.jpg

Financial Analysis: Asset Management Ratios

Analysis of Sales Growth Index

(Harrington, 2005; Beneish, 1999)


Analysis of gross margin index l.jpg

Financial Analysis: Asset Management Ratios

Analysis of Gross Margin Index

(Harrington, 2005; Beneish, 1999)


Analysis of days sales in receivables index l.jpg

Financial Analysis: Asset Management Ratios

Analysis of Days’ Sales in Receivables Index

(Harrington, 2005; Beneish, 1999)


Analysis of asset quality index l.jpg

Financial Analysis: Asset Management Ratios

Analysis of Asset Quality Index

Asset Quality Index = (1 – [(CA + Net FA)/Total Assets] Current Year)

(1- [(CA + Net FA)/Total Assets] Prior Year)

Asset Quality Index = (1 – [(3,150,400 + 900,600)/4,051,000]

(1-[(1,938,000 + 900,900/2,838,900]

Asset Quality Index = (1 – [4,051,000/4,051,000] = 1.000

(1-[2,838,900/2,838,900]

(Harrington, 2005; Beneish, 1999)


Slide64 l.jpg

Example of Financial Statement Fraud

(Wells, August 2001; Beneish, 1999)


Slide65 l.jpg

(Wells, August 2001; Beneish, 1999)


Slide66 l.jpg

Sales Growth Index = Current Period Sales/Prior Period Sales

Non-manipulators’ mean: 1.134

Manipulators’ mean: 1.607 and above

(Wells, August 2001; Beneish, 1999)


Slide67 l.jpg

Asset Quality Index = (1 – CA + Net FA/Total Assets Current Year)

(1-CA + Net FA/Total Assets Prior Year)

Non-manipulators’ mean: 1.039

Manipulators’ mean: 1.254 and above

(Wells, August 2001; Beneish, 1999)


Usefulness of financial ratio analysis l.jpg

Usefulness of Financial Ratio Analysis:

(Williams, Haka, Bettner, & Carcello, 2008)

  • Quickly evaluate a company’s financial position & profitability.

  • Used for trend analysis within a company over a period of years.

  • Can compare the financial strength of different companies.


Qualitative factors in financial statement analysis l.jpg

  • Revenues Tied To One Key Customer, Product, Or Supplier

  • Competition

  • Future Prospects

  • Qualitative Factors

  • Legal Environment

  • Regulatory

  • Environment

Qualitative Factors in Financial Statement Analysis

(Brigham & Houston, 2007)


Limitations of financial statement ratio analysis l.jpg

  • Different Accounting Practices

  • Inappropriate Industry Comparisons

  • Industry Trends; Seasonal

  • Technological Changes

  • Economic Factors

  • Limitations of FS Ratio Analysis

Limitations of Financial Statement Ratio Analysis

Analysts should look beyond the ratios.

(Albright & Ingram, 2006)


Limitations of financial statements l.jpg

  • Delay in providing information

Omission of

Transactions

  • Use of Historical Costs

  • Omission of resources & costs

  • Limitations of FS

Limitations of Financial Statements

  • Use of Estimates

Analysts should research company & industry.

(Albright & Ingram, 2006)


Efforts to prevent detect fraud l.jpg

Efforts to Prevent & Detect Fraud

  • ACFE Educational Anti-fraud Resources

  • AICPA Antifraud & Corporate Responsibility Center

  • Sarbanes Oxley Act of 2002


Free information sources l.jpg

Free Information Sources

  • SEC Edgar Database

    http://www.sec.gov/search/search.htm

  • Yahoo Finance

    http://finance.yahoo.com/

  • Company Websites

  • http://www.bizstats.com/


Slide74 l.jpg

Summary

  • Fraud

    • Common Thread in Definitions

    • Types of Fraud

    • Fraud Triangle/Fraud Diamond

    • Incentives To Commit Financial Statement

      • Fraud

    • Financial Statement Fraud Issues

  • Basic Financial Statements

    • Standard Setting

    • Components of Financial Statements

  • Ratio Analysis

    • Categories of Financial Ratios

    • Ratio Analysis Usefulness as a Tool


Slide75 l.jpg

THANK YOU FOR YOUR ATTENTION!

CONTACT E-MAIL:

jmrendon@nps.edu


Slide76 l.jpg

QUESTIONS?


References l.jpg

References

Albright, T. L., & Ingram, R. W. (2006). Financial accounting: A bridge to decision-making. 6th Edition. Mason, OH: Thomson South-Western.

ACFE 2008 Report to the Nation on Occupational Fraud and Abuse. (2008)

Beneish, M. D. (1999, September/October). The detection of earnings manipulation. Financial Analyst Journal. 55(5), 24-36.

Brigham, E. F., & Houston, J. F. (2007). Fundamentals of financial management. 5th Edition. Mason, OH: Thomson South-Western.

Fraser L. M. & Ormiston, A. (2010). Understanding Financial Statements, 9th Edition. New York, NY: Prentice Hall

Fraud definition. (n.d.) Retrieved from http://www.yourdictionary.com/fraud


References continued l.jpg

References (continued)

Fraud Definition. Internal Revenue Service. Internal Revenue Manual § 25.1.1.2 (05-19-1999) Retrieved from http://www.irs.gov/irm/part25/ch01s01.html#d0e43

GAO. (2006, June 19).Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and Abuse. GAO Code 120518/GAO-06-838R.

Harrington, C. (2005, March/April). Formulas for detection: Analysis ratios for detecting financial statement fraud. Fraud Magazine. Association of Certified Fraud Examiners. Retreived January 15, 2009, from http://www.acfe.com/resources/view-content.asp?ArticleID=416

Rosplock, M. F. (2001, June). Advanced analytical techniques for performing forensic financial analysis. Business Credit. 103(6), 26-31.


References continued79 l.jpg

References (continued)

Well, Joseph T. (2008). Principles of Fraud Examination. 2nd Edition. Hobken, NJ: John Wiley & Sons, Inc.

Wells, J. T. (2001, August). Irrational Ratios. Journal of Accountancy. 192(2), 80-83.

Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J. V. (2008). Financial & managerial accounting: The basis for business decisions. 14th Edition. New York, NY: McGraw-Hill/Irwin.

Wolf D. T. & Hermanson, D. R. (2004, December). The fraud diamond: Considering the four elements of fraud. The CPA Journal. 38-42.