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Financial Statement Frauds Red Flags of Fraud. Financial Statement Frauds. Revenue/Accounts Receivable Frauds (Global Crossing, Quest, ZZZZ Best) Inventory/Cost of Goods Sold Frauds (PharMor) Understating Liability/Expense Frauds (Enron) Overstating Asset Frauds (WorldCom) - PowerPoint PPT Presentation
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Financial Statement Financial Statement FraudsFrauds
Red Flags of FraudRed Flags of Fraud
Financial Statement FraudsFinancial Statement Frauds
1.1. Revenue/Accounts Receivable Frauds Revenue/Accounts Receivable Frauds (Global Crossing, Quest, ZZZZ Best)(Global Crossing, Quest, ZZZZ Best)
2.2. Inventory/Cost of Goods Sold Frauds Inventory/Cost of Goods Sold Frauds (PharMor)(PharMor)
3.3. Understating Liability/Expense Understating Liability/Expense Frauds (Enron)Frauds (Enron)
4.4. Overstating Asset Frauds (WorldCom)Overstating Asset Frauds (WorldCom)5.5. Overall Misrepresentation (Bre-X Overall Misrepresentation (Bre-X
Minerals)Minerals)
1. Revenue Related Financial 1. Revenue Related Financial Statement FraudsStatement Frauds
By far, the most common accounts By far, the most common accounts manipulated when perpetrating manipulated when perpetrating financial statement fraud are revenues financial statement fraud are revenues and/or accounts receivable.and/or accounts receivable.
Accounts ReceivableAccounts Receivable xxxxxx
RevenuesRevenuesxxxxxx
(Income Assets )(Income Assets )
Revenue-Related Transactions and Frauds
See Excel handout #1
2. Overstating Inventory2. Overstating Inventory
The second most common way to The second most common way to commit financial statement fraud is commit financial statement fraud is to overstate inventory.to overstate inventory.Beginning InventoryBeginning Inventory OKOKPurchasesPurchases OKOKGoods Available for saleGoods Available for sale OKOKEnding InventoryEnding Inventory HighHighCost of Goods SoldCost of Goods Sold LowLowIncomeIncome HighHigh
Inventory/Cost of Goods Sold Frauds
See Excel handout #2
3. Understating Liability Frauds3. Understating Liability Frauds
Not recording accounts payableNot recording accounts payableNot recording accrued liabilitiesNot recording accrued liabilitiesRecording unearned revenues as Recording unearned revenues as
earnedearnedNot recording warranty or service Not recording warranty or service
liabilitiesliabilitiesNot recording loans or keep liabilities off Not recording loans or keep liabilities off
the booksthe booksNot recording contingent liabilitiesNot recording contingent liabilities
4. Asset Overstatement Frauds4. Asset Overstatement Frauds
Overstatement of Current Assets (e.g. Overstatement of Current Assets (e.g. Marketable Securities)Marketable Securities)
Overstating Pension AssetsOverstating Pension Assets Capitalizing as assets amounts that should Capitalizing as assets amounts that should
be expensedbe expensed Failing to record depreciation/amortization Failing to record depreciation/amortization
expenseexpense Overstating assets through mergers and Overstating assets through mergers and
acquisitionsacquisitions Overstating inventory and receivables Overstating inventory and receivables
(covered earlier)(covered earlier)
5. Disclosure Frauds5. Disclosure FraudsThree Categories of Disclosure Frauds:
1. Overall misrepresentations about the nature of the company or its products, usually made through news reports, interviews, annual reports, and elsewhere
2. Misrepresentations in the management discussions and other non-financial statement sections of annual reports, and other reports
3. Misrepresentations in the footnotes to the financial statements
Changes in employee lifestyle, habits and behaviour
Decline in employee morale and/or attendance
Operating on a crisis basis Unexplained variances One employees “does it all” and
wants to control everything
Changes in employee lifestyle, habits and behaviour
Decline in employee morale and/or attendance
Operating on a crisis basis Unexplained variances One employees “does it all” and
wants to control everything
RED FLAGS OF FRAUDRED FLAGS OF FRAUD
Missing, altered, or perfect documents
Invoice items do not appear consistent
Excessive rush or emergency transactions
Vendors with generic names and/or Post Office Boxes as addresses
Payments made from non-original documentation
Missing, altered, or perfect documents
Invoice items do not appear consistent
Excessive rush or emergency transactions
Vendors with generic names and/or Post Office Boxes as addresses
Payments made from non-original documentation
RED FLAGS OF FRAUD(continued)
RED FLAGS OF FRAUD(continued)
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