Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER THREE

Fictitious and Inflated Revenue

FICTITIOUS REVENUE SCHEMES

Fictitious revenue schemes artificially inflate a company's profits by recording phony revenues for goods or services that are never delivered. These schemes are distinguished from timing difference schemes in that with fictitious revenues, the revenue should not be recognized in any period. This is normally accomplished in one of two manners:

1. Recording journal entries for sales without attributing the sales to specific customers (e.g., “top-side” entries)

2. Recording sales attributable to fictitious customers

A third technique, recording of phony sales to legitimate customers, can be utilized but is less common.

The mechanics of fictitious revenue schemes will be illustrated through descriptions of three cases:

1. Satyam Computer Services Ltd.

2. Symmetry Medical Sheffield

3. LocatePlus Holdings Corporation

Satyam Computer Services Ltd.

One of largest reported fictitious revenue cases occurred with Satyam Computer Services Ltd., which later became Mahindra Satyam Ltd. Satyam was incorporated in India and was recognized as one of that country's largest information technology services companies. It employed more than 40,000 people in offices throughout the world.

From at least 2003 through September 2008, false and inflated sales invoices were created outside the normal accounting processes by which revenues were recorded. This resulted in fraudulently reported revenues of more than $1 billion. During ...