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Financial Statement Fraud: Strategies for Detection and Investigation

Book Description

Valuable guidance for staying one step ahead of financial statement fraud

Financial statement fraud is one of the most costly types of fraud and can have a direct financial impact on businesses and individuals, as well as harm investor confidence in the markets. While publications exist on financial statement fraud and roles and responsibilities within companies, there is a need for a practical guide on the different schemes that are used and detection guidance for these schemes. Financial Statement Fraud: Strategies for Detection and Investigation fills that need.

  • Describes every major and emerging type of financial statement fraud, using real-life cases to illustrate the schemes

  • Explains the underlying accounting principles, citing both U.S. GAAP and IFRS that are violated when fraud is perpetrated

  • Provides numerous ratios, red flags, and other techniques useful in detecting financial statement fraud schemes

  • Accompanying website provides full-text copies of documents filed in connection with the cases that are cited as examples in the book, allowing the reader to explore details of each case further

Straightforward and insightful, Financial Statement Fraud provides comprehensive coverage on the different ways financial statement fraud is perpetrated, including those that capitalize on the most recent accounting standards developments, such as fair value issues.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Dedication
  6. Foreword
  7. Preface
    1. ABOUT THIS BOOK
    2. GLOSSARY OF ABBREVIATIONS USED THROUGHOUT THIS BOOK
  8. Acknowledgments
  9. Part 1: Revenue-Based Schemes
    1. Chapter 1: Introduction to Revenue-Based Financial Reporting Fraud Schemes
      1. REVENUE RECOGNITION PRINCIPLES
      2. CHANGES PROPOSED BY FASB AND IASB
      3. OVERVIEW OF REVENUE-BASED SCHEMES
    2. Chapter 2: Timing Schemes
      1. ALTERATION OF RECORDS
      2. SHIPPING SCHEMES
      3. PERCENTAGE OF COMPLETION SCHEMES
      4. IMPROPER ESTIMATES OF REVENUE RECOGNITION PERIOD
      5. MULTIPLE-ELEMENT REVENUE RECOGNITION SCHEMES
      6. CUSTOMER LOYALTY PROGRAMS
      7. CHANNEL STUFFING
      8. BILL AND HOLD SCHEMES
      9. SALES WITH RIGHT OF RETURN
      10. IMPROPER PUSHING OF CURRENT REVENUE TO FUTURE PERIODS
      11. USE OF RESERVES AS A RAINY DAY FUND
    3. Chapter 3: Fictitious and Inflated Revenue
      1. FICTITIOUS REVENUE SCHEMES
      2. SALES TO RELATED PARTIES
      3. INFLATED REVENUE SCHEMES
      4. CONSIGNMENT OR FINANCING ARRANGEMENTS
    4. Chapter 4: Misclassification Schemes
      1. RECORDING FINANCING ARRANGEMENTS AS REVENUE
      2. ONE-TIME CREDITS REPORTED AS REVENUE
      3. SALES INCENTIVE SCHEMES
    5. Chapter 5: Gross-Up Schemes
      1. AGENT VERSUS PRINCIPAL
      2. BARTER AND ROUND-TRIP TRANSACTIONS
      3. PHONY REVENUE AND EXPENSES
  10. Part 2: Asset-Based Schemes
    1. Chapter 6: Improper Capitalization of Costs
      1. START-UP COSTS
      2. RESEARCH AND DEVELOPMENT COSTS
      3. PROPERTY AND EQUIPMENT
      4. SOFTWARE DEVELOPMENT AND ACQUISITION COSTS
      5. WEBSITE COSTS
      6. INTANGIBLE ASSETS
      7. ADVERTISING COSTS
      8. OTHER DEFERRALS AND PREPAID EXPENSES
      9. INVENTORY CAPITALIZATION SCHEMES
      10. INVENTORY FLOW ASSUMPTIONS
    2. Chapter 7: Asset Valuation Schemes
      1. FICTITIOUS ASSETS
      2. INVENTORY VALUATION SCHEMES
      3. INFLATING THE BASIS OF PROPERTY AND EQUIPMENT
      4. INFLATING THE BASIS OF ASSETS ACQUIRED IN NONCASH TRANSACTIONS
      5. ASSETS ACQUIRED FROM RELATED PARTIES
      6. UNDERSTATING DEPRECIATION AND AMORTIZATION EXPENSE
      7. INVESTMENT PROPERTY
      8. IMPROPER VALUATION OF INVESTMENTS-FINANCIAL ASSETS
      9. LOANS
      10. EQUITY METHOD INVESTMENTS
      11. PROPORTIONATE CONSOLIDATION
      12. IMPROPER CLASSIFICATION OR AMORTIZATION OF INTANGIBLE ASSETS
      13. IMPAIRMENT LOSSES-NONFINANCIAL ASSETS
      14. INVESTMENTS IN INSURANCE CONTRACTS
    3. Chapter 8: Fair Value Accounting
      1. FAIR VALUE CONSIDERATIONS
      2. METHODS OF MEASURING FAIR VALUE
      3. INTERNAL VERSUS EXTERNALLY DEVELOPED VALUATIONS
      4. INPUTS USED IN MEASURING FAIR VALUE
  11. Part 3: Expense and Liability Schemes
    1. Chapter 9: Shifting Expenses to Future Periods
      1. TIMING SCHEMES INVOLVING LIABILITIES
      2. ACCOUNTS PAYABLE
      3. COMPENSATED ABSENCES
      4. CONTINGENT LIABILITIES
      5. ACCRUED COMPENSATION
      6. IMPROPER USE OF LIABILITY “RESERVES”
    2. Chapter 10: Omissions and Underreporting of Liabilities
      1. DEBT
      2. GUARANTEES
      3. PENSION LIABILITIES
      4. CONDITIONAL ASSET RETIREMENT OBLIGATIONS
  12. Part 4: Other Financial Reporting Schemes
    1. Chapter 11: Consolidations and Business Combinations
      1. FRAUDULENT REPORTING INVOLVING CONSOLIDATIONS
      2. BUSINESS COMBINATIONS
    2. Chapter 12: Financial Reporting Fraud as a Concealment Tool
      1. FINANCIAL STATEMENT FRAUD TO CONCEAL ASSET MISAPPROPRIATIONS
      2. FINANCIAL STATEMENT FRAUD TO CONCEAL ILLEGAL ACTS
    3. Chapter 13: Financial Statement Fraud by Not-for-Profit Organizations
      1. INFLATING THE VALUE OF NON-CASH CONTRIBUTIONS
      2. IMPROPERLY REPORTING CONTRIBUTIONS RAISED FOR OTHERS
      3. NETTING THE RESULTS OF FUND-RAISING EVENTS
      4. IMPROPER ALLOCATION OF COSTS ASSOCIATED WITH JOINT ACTIVITIES
      5. MISCLASSIFICATION OF EXPENSES
    4. Chapter 14: Disclosure Fraud
      1. CATEGORIES OF DISCLOSURE FRAUD
      2. COMMON DISCLOSURE RISKS
  13. Part 5: Detection and Investigation
    1. Chapter 15: Detecting Financial Statement Fraud
      1. MOTIVES FOR FINANCIAL STATEMENT FRAUD
      2. FRAUD RISK INDICATORS
      3. INTERNAL CONTROL INDICATORS
    2. Chapter 16: Financial Statement Analysis
      1. USE OF ANALYTICAL TECHNIQUES TO DETECT FRAUD
      2. HORIZONTAL ANALYSIS
      3. VERTICAL ANALYSIS
      4. BUDGET VARIANCE ANALYSIS
    3. Chapter 17: Ratio Analysis
      1. RESEARCH ON RATIO ANALYSIS
      2. USE OF OPERATING RATIO ANALYSIS TO DETECT FINANCIAL STATEMENT FRAUD
      3. ANOTHER USEFUL MEASURE: WORKING CAPITAL TO TOTAL ASSETS
    4. Chapter 18: Other Detection Procedures
      1. ANALYSIS UTILIZING MULTIPLE RATIOS
      2. RATIOS INVOLVING NONFINANCIAL DATA
      3. OTHER INFORMATION AND DISCLOSURES IN FINANCIAL STATEMENTS
      4. UNDERSTANDABILITY OF FINANCIAL STATEMENT DISCLOSURES
      5. TESTING OF JOURNAL ENTRIES
    5. Chapter 19: Fraud or Honest Mistake?
      1. THE “SMOKING GUN”
      2. WITNESSES
      3. ALTERED DOCUMENTS
      4. MULTIPLE RECORDS
      5. DESTRUCTION OF EVIDENCE
      6. ACTIONS THAT CONTRADICT RECOMMENDATIONS
      7. PATTERNS OF BEHAVIOR
      8. PERSONAL GAIN
      9. THERE'S NO OTHER EXPLANATION FOR IT
    6. Chapter 20: Assessing (or Minimizing) Auditor Liability
      1. LITIGATION AGAINST AUDITORS
      2. CONCEALMENT FROM THE AUDITORS
      3. AUDITING STANDARDS
      4. CONSIDERATION OF THE RISKS OF MATERIAL MISSTATEMENT
      5. IMPROPER OR INADEQUATE USE OF ANALYTICAL PROCEDURES
      6. AUDITING ACCOUNTING ESTIMATES AND FAIR VALUES
      7. REVENUE RECOGNITION RISKS
      8. INSUFFICIENT CONSIDERATION OF RELATED PARTY TRANSACTIONS
      9. AUDITING DISCLOSURES IN THE FINANCIAL STATEMENTS
      10. OVERRELIANCE ON THE MANAGEMENT REPRESENTATION LETTER
  14. Appendix: Financial Statement Fraud Indicators
  15. Bibliography
  16. About the Author
  17. About the Website
  18. Index
  19. Index to Cases