Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER FIVE

Gross-Up Schemes

IN SOME CASES, a company's reporting objective is not necessarily to improve the appearance of profitability. The goal can also be to appear larger, processing a greater volume of transactions and activities. This objective can lead the company to engage in gross-up schemes.

Under both U.S. GAAP and IFRS, certain amounts collected from customers should not be reported as revenue. For example:

• Sales taxes, service taxes, and value added taxes
• Amounts collected on behalf of a principal with whom the reporting entity has an agency relationship

However, reimbursements for out-of-pocket expenses are generally to be recognized as revenue (rather than as an offset to expenses).

In addition, IAS 18 notes when goods or services are exchanged for other goods or services that are similar in nature, revenue should not be recognized.

AGENT VERSUS PRINCIPAL

If a company receives a payment but is acting in the capacity as an agent for another entity (the principal), the company should not record the entire amount as revenue, and the amount remitted to the principal separately as costs. Instead, the agent company should merely record any net amount from the transaction as revenue. The amount to be remitted to the principal should be accounted for as a liability when it is received. The liability is then eliminated when payment is remitted to the principal.

Examples of transactions in which this issue emerges are plentiful. One of the most common examples involves ...