Today’s TopicsBarriers to TransparencyFinancial Fraud StatisticsDrivers of 2000’s MeltdownFinancial Fraud Motivation18 Key TidbitsFinancial Fraud DetectionFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-1Today’s TopicsTransparency BarriersNature of Financial FraudDetection of Financial FraudFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-2Barriers to TransparencyTransparency definedWYSIWYGManagement biasMeasurement biasFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-3Financial Fraud StatisticsKey playersCOSOThe Treadway Comm.-NCFFRSEC’s AAERsAccounting & Auditing Enforcement ReleasesTreadway Commission: 1987Infrequent but costlyCOSO Update: 1999300 AAERs 1987-1997FORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-4Drivers of 2000’s Meltdown1. Booming economy2. Moral decay3. Incentives4. Analysts’ expectations5. Debt6. Rules versus principles7. Auditor independence issues8. Greed9. Educator failure10. Failure to forecastFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-5Financial Fraud Motivation1. Greed2. Fear of failure3. Lack of accounting expertise4. Scope of operations—too broadFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-618 Key TidbitsAverage period: 23.7 monthsRevenue frauds were #1Asset misstatement-spread aroundMean misstatement = $25 MCEO involved in 72% of the casesLast audit was unqualified in 55% of the casesMean assets = $532 M; revenues = $232 MS/W and manufacturing involved in 12% of the casesNASDAQ had 78%36% filed for bankruptcyNon-existent or uninvolved audit committeesInsiders on Boards of DirectorsFamily relationships were commonFinancial pressures were high56% of auditors were Big 6Auditors named in 30% of cases25% changed auditors after the fraudRelatively few executives went to prisonFORENSIC ACCOUNTING - BA124 – Fall 2011 Slide 15-7Financial 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,