Financial Statement Fraud

Transcription

1 Financial Statement Fraud ^rateg/es for Detection and Investigation GERARD M. ZACK CFE, CPA, CIA, CCEP WILEY John Wiley & Sons, Inc.

2 Contents Foreword Preface xvii xiii Acknowledgments xxi II PART I REVENUE-BASED SCHEMES 1 Chapter 1 Introduction to Revenue-Based Financial Reporting Fraud Schemes 3 Revenue Recognition Principles fc> 3 Changes Proposed by FASB and IASB 5 Overview of Revenue-Based Schemes 6 Chapter 2 Timing Schemes 9 Alteration of Records 9 Shipping Schemes 10 Percentage of Completion Schemes 12 Improper Estimates of Revenue Recognition Period 15 Multiple-Element Revenue Recognition Schemes 17 Customer Loyalty Programs 22 Channel Stuffing 24 Bill and Hold Schemes 27 Sales with Right of Return 29 Improper Pushing of Current Revenue to Future Periods 30 Use of Reserves as a Rainy Day Fund 32 Chapter 3 Fictitious and Inflated Revenue 33 Fictitious Revenue Schemes 33 Sales to Related Parties 37 VII

3 viii Q Contents Inflated Revenue Schemes 41 Consignment or Financing Arrangements 43 Chapter 4 Misclassification Schemes 47 Recording Financing Arrangements as Revenue 47 One-Time Credits Reported as Revenue 49 Sales Incentive Schemes 50 Chapter 5 Gross-Up Schemes 57 Agent versus Principal 58 Barter and Round-Trip Transactions 59 Phony Revenue and Expenses 61 tj PART II ASSET-BASED SCHEMES 63 Chapter 6 Improper Capitalization of Costs 65 Start-Up Costs. " 66 Research and Development Costs 67 Property and Equipment 68 Software Development and Acquisition Costs t, 71 Website~Costs 73 Intangible Assets 75 Advertising Costs 77 Other Deferrals and Prepaid Expenses 79 Inventory Capitalization Schemes 80 Inventory Flow Assumptions. 81 Chapter 7 Asset Valuation Schemes 85 Fictitious Assets 85 Inventory Valuation Schemes 86 Inflating the Basis of Property and Equipment 88 Inflating the Basis of Assets Acquired in Noncash Transactions 89 Assets Acquired from Related Parties 92 Understating Depreciation and Amortization Expense 93 Investment Property 95 Improper Valuation of Investments Financial Assets 96 Loans 104 Equity Method Investments 108

4 Contents ix Proportionate Consolidation 109 Improper Classification or Amortization of Intangible Assets 111 Impairment Losses Nonfinancial Assets 112 Investments in Insurance Contracts 115 Chapter 8 Fair Value Accounting 117 Fair Value Considerations 117 Methods of Measuring Fair Value 118 Internal versus Externally Developed Valuations 124 Inputs Used in Measuring Fair Value 127 PART III EXPENSE AND LIABILITY SCHEMES 129 Chapter 9 Shifting Expenses to Future Periods 131 Timing Schemes Involving Liabilities 131 Accounts Payable 131 Compensated Absences 132 Contingent Liabilities 133 Accrued Compensation 137 Improper Use of Liability "Reserves" 138 ta Chapter 10 Omissions and Underreporting of Liabilities 141 Debt. 141 Guarantees 146 Pension Liabilities 149 Conditional Asset Retirement Obligations 152 PART IV OTHER FINANCIAL REPORTING SCHEMES 155 Chapter 11 Consolidations and Business Combinations 157 Fraudulent Reporting Involving Consolidations 157 Business Combinations 164 Chapter 12 Financial Reporting Fraud as a Concealment Tool 171 Financial Statement Fraud to Conceal Asset Misappropriations 171 Financial Statement Fraud to Conceal Illegal Acts 174

5 a Contents Chapter 13 Financial Statement Fraud by Not-for-Profit Organizations 177 Inflating the Value of Non-Cash Contributions 179 Improperly Reporting Contributions Raised for Others 179 Netting the Results of Fund-Raising Events 180 Improper Allocation of Costs Associated with Joint Activities 182 Misclassification of Expenses 185 Chapter 14 Disclosure Fraud 187 Categories of Disclosure Fraud 189 Common Disclosure Risks 189 PART V DETECTION AND INVESTIGATION 197 Chapter 15 Detecting Financial Statement Fraud 199 Motives for Financial Statement Fraud 200 Fraud Risk Indicators 202 Internal Control Indicators 202 Chapter 16 Financial Statement Analysis 209 Use of Analytical Techniques to Detect Fraud 209 Horizontal Analysis 210 Vertical Analysis 211 Budget Variance Analysis 212 Chapter 17 Ratio Analysis 215 Research on Ratio'Analysis 216 Use of Operating Ratio Analysis to Detect Financial Statement Fraud 217 Another Useful Measure: Working Capital to Total Assets 225 Chapter 18 Other Detection Procedures 227 Analysis Utilizing Multiple Ratios 227 Ratios Involving Nonfinancial Data 231 Other Information and Disclosures in Financial Statements 232 Understandability of Financial Statement Disclosures 234 Testing of Journal Entries 235

6 Contents a xi Chapter 19 Fraud or Honest Mistake? 239 The "Smoking Gun" 240 Witnesses 240 Altered Documents 241 Multiple Records 242 Destruction of Evidence 242 Actions That Contradict Recommendations 243 Patterns of Behavior 244 Personal Gain 244 There's No Other Explanation for It 244 Chapter 20 Assessing (or Minimizing) Auditor Liability 245 Litigation against Auditors. 246 Concealment from the Auditors 247 Auditing Standards 248 Consideration of the Risks of Material Misstatement 249 Improper or Inadequate Use of Analytical Procedures 254. Auditing Accounting Estimates and Fair Values 257 " Revenue Recognition Risks 263 Insufficient Consideration of Related Party Transactions 266 Auditing Disclosures in the Financial Statements fa 266 Overreliance on the Management Representation Letter 267 Appendix: Financial Statement Fraud Indicators 269 Bibliography 275 About the Author 277 About the Website 279 Index 281 Index to Cases 287