Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 3 Fraudulent Financial Reporting © 2007 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com An International Problem
Fraud is an international phenomenon touching all Fraud countries. Transparency International (TI) is a global network including more than 90 locally established national chapters and chapters-in-formation, whose goal is to fight corruption in the national arena. TI produces a Transparency International Corruption Perception Index (CPI), which ranks more than 150 countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys.
Chapter 3 Forensic and Investigative Accounting 2 SAS No. 2
Statement of Financial Accounting Concepts No. 2 Statement provides these nine qualities and characteristics that make financial information useful for investors, creditors, analysts, and other users of financial information: analysts, Relevance Timeliness Reliability Verifiability Representational Representational faithfulness faithfulness Chapter 3 Neutrality Comparability and Comparability consistency consistency Materiality Feasibility or costs and Feasibility benefits benefits 3 Forensic and Investigative Accounting Three M’s of Financial Reporting Fraud Manipulation, falsification, or alteration of falsification, accounting records or supporting documents from which financial statements are prepared. from Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information. transactions, Intentional misapplication of accounting Intentional misapplication principles relating to amounts, classification, manner of presentation, or disclosure. manner Source: D.S. Hilzenrath, “Forensic Auditors Find What Some Companies Try to Hide,” The Washington Post, November 23, 2002, p.19.
Chapter 3 Forensic and Investigative Accounting 4 Fraud Schemes Based on Fraud SEC Releases SEC
1. 2. 3. 4. 5. Fictitious and/or overstated revenues and Fictitious assets. assets. Fictitious reductions of expenses and liabilities. Premature revenue recognition. Misclassified revenues and assets. Overvalued assets or undervalued expenses and Overvalued liabilities. liabilities.
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Chapter 3 Forensic and Investigative Accounting 5 Fraud Schemes Based on Fraud SEC Releases SEC
1. 2. 3. 4. 5. 6. Omitted liabilities. Omitted or improper disclosures. Equity fraud. Related-party transactions. Alter ego. Minimizing income or inflating expenses to Minimizing reduce tax liabilities. reduce
Forensic and Investigative Accounting 6 Chapter 3 Shenanigans to Boost Earnings Recording revenue before it is earned. Creating fictitious revenue. Boosting profits with nonrecurring Boosting transactions. transactions. Shifting current expenses to a later period. Failing to record or disclose liabilities. Shifting current income to a later period. Shifting future expenses to an earlier period.
Forensic and Investigative Accounting 7 Chapter 3 Internal vs. External Fraud
Internal Employee Management Stock theft Lapping Misappropriation Expense accounts Misappropriation of cash assets of Lapping False financial False statements statements Check forgery Misappropriation Misappropriation of cash/assets of Expense accounts Unnecessary Unnecessary purchases purchases
Chapter 3 Forensic and Investigative Accounting External Check forgery False insurance False claims claims Credit card fraud False invoices Product Product substitution substitution
8 Internal vs. External Fraud (contd.)
Internal Employee Management Petty cash Check forgery Kickbacks Loans/ investments Kickbacks Ghost vendors Diversion of sales
Source: KPMG, Fraud Awareness Survey, Dublin: KPMG, 1995, pp. 10-12.
Chapter 3 Forensic and Investigative Accounting 9 External Bribes/secret Bribes/secret commission commission Bid rigging/price Bid fixing fixing False representation False of funds of Four Factors Contributing to Four Business Fraud Business
1. 2. 3. 4. Motive Opportunity Lack of integrity (or rationalization) Capacity—the person must have the Capacity—the necessary traits, abilities, or positional authority to commit the crime authority Chapter 3 Forensic and Investigative Accounting 10 Components of Internal Controls
Control environment Risk assessment Control activities or control procedures Information and communication systems Information support support Monitoring Source: SAS No. 94, The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit, New York: AICPA.
Chapter 3 Forensic and Investigative Accounting 11 Types of Controls
Preventive Controls Segregation of duties Required approvals Securing assets Passwords Using document control numbers Drug testing Job rotation Computer backup
Forensic and Investigative Accounting 12 Chapter 3 Types of Controls
Detective Controls Reconciliations Reviews Event notifications Surprise cash count Counting inventory Chapter 3 Forensic and Investigative Accounting 13 Types of Controls
Corrective Controls Training Process redesign Additional technology Quality circle teams Budget variance reports Chapter 3 Forensic and Investigative Accounting 14 Earnings Management
Earnings management may be defined as the Earnings “purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.” obtaining
– Katherine Schipper, “Commentary on Earnings Management,” Accounting Horizon, December 1989, p. 92. Management,” Chapter 3 Forensic and Investigative Accounting 15 ...
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