CWU ACCT 461 - Chapter 12 Fraudulent Financial Statement Schemes

Unformatted text preview:

Chapter 12Pop QuizLearning ObjectivesSlide 4Financial Statement Fraud DefinedDefining Financial Statement FraudCosts of Financial Statement FraudSlide 8Slide 9Slide 10Methods of Financial Statement FraudFictitious RevenuesRed Flags – Fictitious RevenuesSlide 14Timing DifferencesSlide 16Red Flags – Timing DifferencesConcealed LiabilitiesRed Flags – Concealed LiabilitiesSlide 20Improper DisclosuresRed Flags – Improper DisclosuresSlide 23Slide 24Improper Asset ValuationRed Flags – Improper Asset ValuationSlide 27Detection of Fraudulent Financial Statement SchemesSAS 99 (AU 316)Slide 30Slide 31Slide 32Slide 33Slide 34Financial Statement AnalysisDeterrence of Financial Statement FraudReduce Pressures to Commit Financial Statement FraudReduce the Opportunity to Commit Financial Statement FraudReduce Rationalization of Financial Statement FraudSlide 401Fraudulent Financial Statement SchemesChapter 122Name at least three of the five principal financial statement fraud schemes.Pop Quiz3Learning Objectives•Define financial statement fraud and related schemes.•Understand and identify the five classifications of financial statement fraud.•Explain how fictitious revenues schemes are committed, as well as the motivation for, and result of, committing this fraud.•Explain how timing difference schemes are committed, as well as the motivation for, and result of, committing this fraud.•Describe the methods by which concealed liabilities and expenses are used to fraudulently improve a company’s balance sheet.4Learning Objectives•Understand how improper disclosures may be used to mislead potential investors, creditors, or any other users of financial statements.•Recognize how improper asset valuation may inflate the current ratio.•Identify detection and deterrence procedures that may be instrumental in dealing with fraudulent financial statement schemes.•Understand financial statement analysis for detecting fraud.•Identify and characterize current professional and legislative actions that have sought to improve corporate governance, enhance the reliability and quality of financial reports, and foster the credibility and effectiveness of audit functions.5Financial Statement Fraud Defined•Deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors.6Defining Financial Statement Fraud•Falsification, alteration, or manipulation of material financial records, supporting documents, or business transactions•Material intentional omissions or misrepresentations of events, transactions, accounts, or other significant information from which financial statements are prepared•Deliberate misapplication of accounting principles, policies, and procedures used to measure, recognize, report, and disclose economic events and business transactions•Intentional omissions of disclosures, or presentation of inadequate disclosures, regarding accounting principles and policies and related financial amounts (Rezaee 2002)7Costs of Financial Statement FraudIn addition to the direct economic losses of fraud are•Legal costs; increased insurance costs; loss of productivity; adverse impacts on employees’ morale, customers’ goodwill, and suppliers’ trust; and negative stock market reactions•These costs are impossible to measure8Costs of Financial Statement Fraud•Undermines the reliability, quality, transparency, and integrity of the financial reporting process•Jeopardizes the integrity and objectivity of the auditing profession, especially of auditors and auditing firms•Diminishes the confidence of the capital markets, as well as of market participants, in the reliability of financial information•Makes the capital markets less efficient9Costs of Financial Statement Fraud•Adversely affects the nation’s economic growth and prosperity•Results in huge litigation costs•Destroys careers of individuals involved •Causes bankruptcy or substantial economic losses by the company engaged in financial statement fraud10Costs of Financial Statement Fraud•Encourages regulatory intervention•Causes devastation in the normal operations and performance of alleged companies•Raises serious doubt about the efficacy of financial statement audits •Erodes public confidence and trust in the accounting and auditing profession11Methods of Financial Statement Fraud•Fictitious revenues•Timing differences•Improper asset valuations•Concealed liabilities and expenses•Improper disclosures12Fictitious Revenues•Recording of goods or services that did not occur•Fake or phantom customers•Legitimate customers•Sales with conditions•Pressures to boost revenues13Red Flags – Fictitious Revenues•Rapid growth or unusual profitability, especially compared to that of other companies in the same industry•Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth•Significant transactions with related parties or special purpose entities not in the ordinary course of business or where those entities are not audited or are audited by another firm14Red Flags – Fictitious Revenues•Significant, unusual, or highly complex transactions, especially those close to period-end that pose difficult “substance over form” questions•Unusual growth in the number of days’ sales in receivables•A significant volume of sales to entities whose substance and ownership are not known•An unusual surge in sales by a minority of units within a company, or of sales recorded by corporate headquarters15Timing Differences•Recording revenue and/or expenses in improper periods•Shifting revenues or expenses between one period and the next, increasing or decreasing earnings as desired16Timing Differences•Matching revenues with expenses•Premature revenue recognition•Long-term contracts•Channel stuffing•Recording expenses in the wrong period17Red Flags – Timing Differences•Rapid growth or unusual profitability, especially compared to that of other companies in the same industry•Recurring negative cash flows from operations, or an inability to generate cash flows from operations, while reporting earnings and earnings growth •Significant, unusual, or highly complex transactions, especially those close to period-end that pose difficult “substance over form” questions•Unusual increase


View Full Document

CWU ACCT 461 - Chapter 12 Fraudulent Financial Statement Schemes

Download Chapter 12 Fraudulent Financial Statement Schemes
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 12 Fraudulent Financial Statement Schemes and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 12 Fraudulent Financial Statement Schemes 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?