SRT510 Business Case Studies

Types of Financial Frauds—excerpts from various sources (sources are listed)

Source: Business Fraud (The Enron Problem), W. Steve AlbrechtPh.D., CPA, CIA, CFE, Brigham Young University, © 2003, 2005 by the AICPA

Link from: http://www.caseplace.org/d.asp?d=1398

© 2003, 2005 by the AICPA

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) Overall Misrepresentation (Bre-X Minerals)

© 2003, 2005 by the AICPA

Transaction Accounts Involved Fraud Schemes

1. Estimate all uncollectible accounts receivable

Bad debt expense, allowance for doubtful accounts

1. Understate allowance for doubtful accounts, thus overstating receivables

2. Sell goods and/or services to customers

Accounts receivable, revenues (e.g. sales revenue) (Note: cost of goods sold part of entryh is included in Chapter 5)

2. Record fictitious sales (related parties, sham sales, sales with conditions, consignment sales, etc.)3. Recognize revenues too early (improper cutoff, percentage of completion, etc.)4. Overstate real sales (alter contracts, inflate amounts, etc.)

3. Accept returned goods from customers

Sales returns, accounts receivable

5. Not record returned goods from customers6. Record returned goods after the end of the period

4. Write off receivables as uncollectible

Allowance for doubtful accounts, accounts receivable

7. Not write off uncollectible receivables8. Write off uncollectible receivables in a later period

5. Collect cash after discount period

Cash, accounts receivable

9. Record bank transfers as cash received from customers10. Manipulate cash received from related parties

6. Collect cash within discount period

Cash, sales discounts, accounts receivable

11. Not recognize discounts given to customers

Revenue-Related Transactions and Frauds

Source: Harvard Business Review: Use Heat Maps to Expose Rare but Dangerous Frauds2:30 PM Wednesday June 17, 2009by Toby J. F. Bishop & Frank Hydoski(Link from: http://blogs.harvardbusiness.org/hbr/hbr-now/2009/06/exposing-rare-but-dangerous-fr.html

Source: To deter and detect fraud: The new corporate creed CEO/CFO Certification News, April 2005 Publish date: January 31, 2008

Link from: http://www.deloitte.com/view/en_CA/ca/article/c0034bdacd0fb110VgnVCM100000ba42f00aRCRD.htm

“Fraud costs Canadian businesses and their stakeholders millions of dollars every year. The true costs of fraud include not only the actual dollars lost, but also the significant costs related to internal investigations, dealing with regulatory or law enforcement agencies and, of course, the damage caused to the organization's reputation and credibility. We have all seen the chilling effects fraud can have on the markets — effects that extend far beyond the millions of dollars lost each year.

Instances of financial fraud have damaged numerous companies beyond recovery, and left investors wary of the public markets and the integrity of corporate management.

…”

“…fraudulent financial activities can extend to all areas of an organization. In designing effective programs and controls, it helps to recognize that fraud can include:

•Fraudulent financial reporting, including improper revenue recognition; improper capitalization of expenses; improper asset valuation; related-party transactions; and improper management override of financial transactions

•Misappropriation of assets

•Improper or unauthorized expenditures, including bribery and other improper payment schemes

•Self-dealings (including kickbacks)

•Violations of laws and regulations, including those that expose a company or its agents to regulatory or criminal sanction

…”

Source: Deloitte: Ten Things About Financial Statement Fraud. A review of SEC enforcement releases, 2000-2006, Deloitte Forensic Center June 2007

Link from: http://www.deloitte.com/dtt/cda/doc/content/us_forensic_tenthings_fraud01072008.pdf