Ch03 Class Notes

Stock price drop of 73 on news of official

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Unformatted text preview: news of official investigation. 50% of fraud firms were listed on NASDAQ Issues with Sec. 404 report for 45% of fraud firms. Chapter 3 Forensic and Investigative Accounting 6 Fraud’s Fatal Failings 85% of fraud victims never get their money never or property back. or Most investigations flounder, leaving the Most victims to defend for themselves against counter-attacks by hostile parties. counter-attacks 30% of companies that fail do so because of fraud. fraud Source: Michael J. Comer, Investigating Corporate Fraud, Source: Investigating Burlington, VT: Gower Publishing, 2003, p. 9. Burlington, Chapter 3 Forensic and Investigative Accounting 7 TYPES OF FRAUDULENT FINANCIAL REPORTING FINANCIAL Chapter 3 Forensic and Investigative Accounting 8 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 9 Fraud Schemes Based on Fraud SEC Releases (pp. 3-6 to 3-16) SEC 1. Fictitious and/or overstated revenues and Fictitious assets. assets. – Bill-and-hold (CocaCola, Daigeo, Lehman) – Mark-to-market (Enron) – Just flat-out making stuff up (ZZZZ Best, Cendant) 2. Fictitious reductions of expenses and liabilities. – Improper capitalization (WorldCom) Chapter 3 Forensic and Investigative Accounting 10 Fraud Schemes Based on Fraud SEC Releases (pp. 3-6 to 3-16) SEC Premature revenue recognition. 3. – Holding the books open (Computer Associates) Misclassified revenues and assets. 3. – Recording securities as “trading” when not Overvalued assets 3. – – Understating allowances Ov...
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