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PRINCIPLES OF FRAUD EXAMINATION Lecture Outline Chapter 11 – Accounting Principles and Fraud I. Fraud in Financial Statements A. Who commits financial statement fraud? 1. Senior management 2. Mid- and lower-level employees 3. Organized criminals A. Why do people commit financial statement fraud? 1. To conceal true business performance a. Overstate performance i. To meet or exceed earnings or revenue growth expectations of stock market analysts ii. To comply with loan covenants iii. To increase the amount of financing available from asset-based loans iv. To meet a lender’s criteria for granting/extending loan facilities v. To meet corporate performance criteria set by the parent company vi. To meet personal performance criteria vii. To trigger performance-related compensation or earn-out payments viii.To support the stock price in anticipation of a merger, acquisition, or sale of personal stockholding ix. To show a pattern of growth to support a planned securities offering or sale of the business b. Understate performance i. To defer “surplus” earnings to the next accounting period ii. To take all possible write-offs in one “big bath” now so future earnings will be consistently higher iii. To reduce expectations now so future growth will be better perceived and rewarded iv. To preserve a trend of consistent growth v.
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This note was uploaded on 04/01/2012 for the course AC 562 AC 562 taught by Professor Online during the Spring '11 term at Keller Graduate School of Management.

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