Chapter 22
Financial Statement Fraud: Revenue and Receivables
Overstating revenue is one of the most common of all financial statement fraud schemes. As a result, the Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, includes a presumption that improper revenue recognition is a fraud risk.1 According to the 2010 report by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), the most common fraud technique involved improper revenue recognition, followed by the overstatement of existing assets or capitalization of expenses. Revenue frauds accounted for more than 60 percent of the 347 alleged cases of public company fraudulent financial reporting from 1998 to 2007.2 More broadly speaking, many fraudulent financial reporting schemes involve earnings management, which the U.S. Securities and Exchange Commission (SEC) has defined as “the use of various forms of gimmickry to distort a company's true financial performance in order to achieve a desired result.”3
Earnings management does not always involve outright violations of Generally Accepted Accounting Principles (GAAP). Companies may try to manage earnings by choosing accounting policies to attain earnings targets. There is a difference between such technique and those that clearly violate GAAP. At the same time, it should be noted that the SEC has cautioned that compliance with GAAP is not a protection against an ...
