FORENSIC ACCOUNTING BA124 Spring 2008Slide 111

1
Todays Topics

• Revenue Frauds
• Inventory Frauds
• Liability Frauds
• Other Asset Frauds
• Disclosure Frauds

2
The 7 Shenanigans-Revisited

• Premature recording of revenue
• Bogus revenue
• One time recurring gains
• Shifting current expenses
• Unrecorded liabilities
• Revenue shifting
• Shifting future expenses

3
General Detection Model

• Period to period account balance analysis
• Period to period relationship analysis
• Comparison with industry averages
• Comparison with physical assets
• General horizontal and vertical analysis

4
Revenue Frauds

• Shenanigans 1 and 2
• Table pps. 408-409
• Revenue cycle
• Sell goods or services
• Estimate collectibility
• Returns
• Write-offs
• Collect cash

5
Revenue Fraud Detection

• Detection
• Accounting anomilies
• Ratios (p.410)

6
Inventory Frauds

• Shenanigan 4
• Table p. 420
• Inventory cycle
• Purchase inventory
• Returns
• Payment
• Sell inventory
• Write offs
• Estimate or count inventory
• Value inventory

7
Inventory Fraud Detection

• Detection
• Statement of cash flows
• Comparison with physical assets
• Ratios (p.421)

8
Liability Fraud

• Shenanigan 5
• Table p. 442
• Liability cycle
• Purchase goods and services
• Incur accruals
• Sell goods and services
• Borrow money
• Payments on account
• Assess contingencies

9
Liability Fraud Detection

• Types
• Understatement
• Unearned revenue
• Omission of debt and contingencies
• Detection
• Accounting anomilies
• Ratios (p.449)

10
Other Asset Fraud

• Shenanigan 4
• Types
• Overstatement
• Improper capitalization
• Understated write offs

11
Other Asset Fraud Detection

• Detection
• Accounting anomilies
• Ratios (p.458 p.463)

12
Inadequate Disclosure Fraud

• Misrepresentation
• Company and its products
• Via financial reports
• Via footnote disclosures

13
Disclosure Fraud Detection

• Detection
• KTT
• Questions on p.468
• Use common sense
• Compare footnotes
• Vigorous use of inquiries
• Go outside the box!
• Fraud Buster Ratio
• (NI - CFO)/Total Assets should approach zero
• Condition worsens as result grows

14
Financial Fraud Detection

• KTT is the key
• Use the Fraud Exposure Rectangle
• Management Directors
• Background, motivation influence
• Company relationships
• Obligations, related party transactions
  compliance
• Nature of organization industry
• Financial results operations
• GAAP, attitude