Financial Statement Fraud: Strategies for Detection and Investigation

PART THREE

Expense and Liability Schemes

THE PURPOSEFUL OMISSION of liabilities for expenses incurred is another common technique used to fraudulently make it appear that a company is financially strong. What makes this type of fraud difficult to detect is the fact that the fraud lies in something that is not on the books, rather than a misstatement of something that has actually been recorded on the balance sheet. Omissions therefore require a different approach by auditors and investigators.

In most cases, failing to accrue expenses represents a timing difference, as the expense eventually becomes due and is paid, at which time the expense is usually recorded. However, pushing expenses off until a future period makes the current period appear more profitable, and that may be exactly what a company is attempting to do.

For a simple example, take the case of Symbol Technologies, Inc. Symbol paid quarterly bonuses to employees in the first quarter of 2000. Payment of compensation would normally trigger an automatic accrual for payroll taxes owed by an employer. In a complaint filed by the SEC, Symbol was charged with failing to accrue $3.5 million of FICA taxes owed by the company in connection with bonuses paid that quarter. Instead, the company recorded the expense in a later period in which the taxes were paid. This resulted in an increase in net income of 7.5 percent for the first quarter.