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© 2009 CCH. All Rights Reserved. Chapter 3 17 Chapter 3 Fraudulent Financial Reporting CHAPTER SUMMARY Overview The objectives of this chapter are to promote an understanding of reporting fraud, the types that exist, how it comes about, and the motives and personalities of those who perpetrate such fraud. Importance of Transparent Financial Information ¶3001 An International Problem Fraud is an international phenomenon touching all countries. Transparency International (TI) is a global network including more than 90 locally established national chapters and chapters-in-formation, whose goal is to f ght corruption in the national arena. ¶3005 Statement of Financial Accounting Concepts No. 2 Statement of Financial Accounting Concepts No. 2 provides nine qualities and characteristics that make f nancial information useful for investors, creditors, analysts, and other users of f nancial information: Relevance Timeliness Reliability Veri f ability Representational faithfulness Neutrality Comparability and consistency Materiality Feasibility or costs and bene f ts Zabihollah Razaee believes that reliable f nancial statements can be achieved with a well-functioning system of corporate governance composed of six groups: the board of directors, the audit committee, the top management team, internal auditors, external auditors, and certain governing bodies (e.g., SEC, PCAOB, AICPA, NYSE, and NASD). Means and Schemes of Financial Reporting Fraud ¶3011 Three M’s of Financial Reporting Fraud At the highest level, there are three types of fraud that are present in fraudulent f nancial reporting situations. These types of fraud can be thought of as the three M’s of f nancial reporting fraud: (1) manipulation, (2) misrepresentation, and (3) misapplication. ¶3021 Abusive Schemes Involving Fraudulent Financial Reporting Fraudulent f nancial statements compose a small percentage of fraud schemes but pack a major economic and international wallop for investors and employees. Typically, fraudulent statement schemes are perpetrated with the knowledge of— if not the support of—top corporate executives.
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18 Forensic and Investigative Accounting Chapter 3 © 2009 CCH. All Rights Reserved. Fictitious or Overstated Revenues and Assets. Fraudsters use any of multiple methods to create f ctitious revenues or assets in order to in f ate income on F nancial statements. A slightly different approach is simply to overstate income—either by omitting elements that would lower actual revenues (such as returns of purchases) or by using mark-to-market accounting to make records of (future) income more ‘‘ f exible.’’ Fictitious Reductions of Expenses and Liabilities. Perpetrators improve the bottom line on F nancial statements using unscrupulous approaches— F ctitious reductions of expenses and liabilities—to mask a corporation’s true losses or debt. Common approaches to such reductions include the burial of deals likely to generate losses in derivative
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This note was uploaded on 01/12/2012 for the course ACCT 555 taught by Professor Briggs during the Spring '11 term at University of Texas at Dallas, Richardson.

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