FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-1 Today’s Topics n Preventing Fraud-Part I n Creating the culture n Shenanigans n Introduction-real world focus n The 13 Shenanigans

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-2 Creating the Culture n Not everyone is honest n Desperate people do desperate things! n Four ways to establish the culture n Hire honest people and train them n Cultivate a positive work environment n Spread a relevant and real (understandable) code of ethics n Provide employee assistance programs

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-3 Hire and Train Honest People n ! (honest, swing, dishonest) n Privacy laws create problems n Resume fraud n Reinforce company policy n If it is to be “no tolerance”; make it no tolerance

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-4 Positive Work Environment n Happy employees usually won’t rip you off! n “I don’t get mad, I get even” mentality n Note the list in the text.

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-5 Code of Ethics n Make it relevant and real n Emphasize who gets hurt n Promote open discussion

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-6 Employee Assistance Programs n We are all human n We can all use help n 6:1 return ratio for EAPs n Combine with your Management by Objectives (MBO) program n Private MBOs

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-7 Howard Schilit’s Financial Shenanigans  3 rd Edition published in 2010  Accounting gimmicks in financial reports  Schilit: president of the Financial Shenanigans Detection Group, LLC  International expert on financial fraud 7

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-8 Three Families—13 Shenanigans  The categories  Earnings manipulation shenanigans  Cash flow shenanigans  Key metrics shenanigans 8

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-9 Earnings Manipulation Shenanigans 1.Premature recognition of revenue 2.Recognition of bogus revenue 3.One time items masked as recurring items 4.Deferral of expenses 5.Hiding expenses 6.Shifting revenue into the future 7.Shifting expenses into the present 9

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-10 Cash Flow Shenanigans 8. Shifts to operating cash increases 9. Shifts to investing cash decreases 10. Misuse of mergers 11. Unsustainable generation of cash flow 10

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-11 Key Metrics Shenanigans 12. Overstating performance metrics 13. Distorting performance metrics 11

FORENSIC ACCOUNTING - BA124 - Fall 2011Slide 4-12 Transparency is the Key  Are the #’s telling the story or making the story?  Is the company managing the business or managing the #’s?  “What is, is?” versus “What is. Is!” 12