Financial Statement Fraud Strategies for Detection and Investigation

GERARD M. ZACK, CFE, CPA, CIA, is a fraud examiner and forensic accountant with more than thirty years of experience performing audits and investigating fraud. In addition to providing antifraud services to clients, he serves on the faculty of the Association of Certified Fraud Examiners, where he conducts antifraud training on financial statement fraud and other topics. He has also spoken at AICPA and IIA events.

Foreword

Preface

Acknowledgments

Part I Revenue-Based Schemes

Chapter 1 Introduction to Revenue-Based Financial Reporting Fraud Schemes

Revenue Recognition Principles

Changes Proposed by FASB and IASB

Overview of Revenue-Based Schemes

Chapter 2 Timing Schemes

Alteration of Records

Shipping Schemes

Percentage of Completion Schemes

Improper Estimates of Revenue Recognition Period

Multiple Element Revenue Recognition Schemes

Customer Loyalty Programs

Channel Stuffing

Bill and Hold Schemes

Sales with Right of Return

Improper Pushing of Current Revenue to Future Periods

Use of Reserves as a ?Rainy Day? Fund

Chapter 3 Fictitious and Inflated Revenue

Fictitious Revenue Schemes

Sales to Related Parties

Inflated Revenue Schemes

Consignment or Financing Arrangements

Chapter 4 Misclassification Schemes

Recording Financing Arrangements as Revenue

One-Time Credits Reported as Revenue

Sales Incentive Schemes

Chapter 5 Gross-Up Schemes

Agent vs. Principal

Barter and Round-Trip Transactions

Phony Revenue and Expenses

Part II Asset-Based Schemes

Chapter 6 Improper Capitalization of Costs

Start-Up Costs

Research and Development Costs

Property and Equipment

Software Development and Acquisition Costs

Website Costs

Intangible Assets

Advertising Costs

Other Deferrals and Prepaid Expenses

Inventory Capitalization Schemes

Inventory Flow Assumptions

Chapter 7 Asset Valuation Schemes

Fictitious Assets

Inventory Valuation Schemes

Inflating the Basis of Property and Equipment

Inflating the Basis of Assets Acquired in Noncash Transactions

Assets Acquired from Related Parties

Understating Depreciation and Amortization Expense

Investment Property

Improper Valuation of Investments ? Financial Assets

Loans

Equity Method Investments

Proportionate Consolidation

Improper Classification or Amortization of Intangible Assets

Impairment Losses ? Nonfinancial Assets

Investments in Insurance Contracts

Chapter 8 Fair Value Accounting

Fair Value Considerations

Methods of Measuring Fair Value

Internal vs. Externally-Developed Valuations

Inputs Used in Measuring Fair Value

Part III Expense and Liability Schemes

Chapter 9 Shifting Expenses to Future Periods

Timing Schemes Involving Liabilities

Accounts Payable

Compensated Absences

Contingent Liabilities

Accrued Compensation

Improper Use of Liability ?Reserves?

Chapter 10 Omissions and Under-Reporting of Liabilities

Debt

Guarantees

Pension Liabilities

Conditional Asset Retirement Obligations

Part IV Other Financial Reporting Schemes

Chapter 11 Consolidations and Business Combinations

Fraudulent Reporting Involving Consolidations

Business Combinations

Chapter 12 Financial Reporting Fraud as a Concealment Tool

Financial Statement Fraud to Conceal Asset Misappropriations

Financial Statement Fraud to Conceal Illegal Acts

Chapter 13 Financial Statement Fraud by Not-for-Profit Organizations

Introduction

Inflating the Value of Non-Cash Contributions

Improperly Reporting Contributions Raised for Others

Netting the Results of Fundraising Events

Improper Allocation of Costs Associated with Joint Activities

Misclassification of Expenses

Chapter 14 Disclosure Fraud

Introduction

Categories of Disclosure Fraud

Common Disclosure Risks

Part V Detection and Investigation

Chapter 15 Detecting Financial Statement Fraud

Introduction

Motives for Financial Statement Fraud

Fraud Risk Indicators

Internal Control Indicators

Chapter 16 Financial Statement Analysis

Use of Analytical Techniques to Detect Fraud

Horizontal Analysis

Vertical Analysis

Budget Variance Analysis

Chapter 17 Ratio Analysis

Research on Ratio Analysis

Use of Operating Ratio Analysis to Detect Financial Statement Fraud

Another Useful Measure: Working Capital to Total Assets

Chapter 18 Other Detection Procedures

Analysis Utilizing Multiple Ratios

Ratios Involving Non-financial Data

Other Information and Disclosures in Financial Statements

Understandability of Financial Statement Disclosures

Testing of Journal Entries

Chapter 19 Fraud or Honest Mistake?

Introduction

The ?Smoking Gun?

Witnesses

Altered Documents

Multiple Records

Destruction of Evidence

Actions That Contradict Recommendations

Patterns of Behavior

Personal Gain

There?s No Other Explanation for It

Chapter 20 Assessing (or Minimizing) Auditor Liability

Introduction

Litigation against Auditors

Concealment from the Auditors

Auditing Standards

Consideration of the Risks of Material Misstatement

Improper or Inadequate Use of Analytical Procedures

Auditing Accounting Estimates and Fair Values

Revenue Recognition Risks

Insufficient Consideration of Related Party Transactions

Auditing Disclosures in the Financial Statements

Over-Reliance on the Management Representation Letter

Appendix Financial Statement Fraud Indicators

Bibliography

About the Author

About the Website

Index

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