1. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-1 Today’s Topics n Revenue Frauds n Inventory Frauds n Liability Frauds n Other Asset Frauds n Disclosure Frauds

2. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-2 General Detection Model n Period to period account balance analysis n Period to period relationship analysis n Comparison with industry averages n Comparison with physical assets n General horizontal and vertical analysis

3. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-3 Revenue Frauds n Shenanigans #1 and #2 n Tables pps. 405-406 n Revenue cycle n Sell goods or services n Estimate collectibility n Returns n Write-offs n Collect cash

4. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-4 Revenue Fraud Detection n Detection n Accounting anomilies n Ratios (p.410)

5. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-5 Inventory Frauds n Shenanigan #4 n Tables pps. 417-418 n Inventory cycle n Purchase inventory n Returns n Payment n Sell inventory n Write offs n Estimate or count inventory n Value inventory

6. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-6 Inventory Fraud Detection n Detection n Statement of cash flows n Comparison with physical assets n Ratios (p.421)

7. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-7 Liability Fraud n Shenanigan #5 n Table p. 450 n Liability cycle n Purchase goods and services n Incur accruals n Sell goods and services n Borrow money n Payments on account n Assess contingencies

8. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-8 Liability Fraud Detection n Types n Understatement n Unearned revenue n Omission of debt and contingencies n Detection n Accounting anomilies n Ratios (p.457)

9. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-9 Other Asset Fraud n Shenanigan #4 n Table p. 466 n Types n Overstatement n Improper capitalization n Understated write offs

10. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-10 Other Asset Fraud Detection n Detection n Accounting anomilies n Ratios (pps. 467-471)

11. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-11 Inadequate Disclosure Fraud n Misrepresentation n Company and its products n Via financial reports n Via footnote disclosures

12. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-12 Disclosure Fraud Detection n Detection n KTT n Questions on pps. 475-476 n Use common sense n Compare footnotes n Vigorous use of inquiries n Go outside the box! n Fraud Buster Ratio n (NI - CFO)/Total Assets; should approach zero n Condition worsens as result grows

13. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-13 Financial Fraud Detection n KTT is the key n Note audit related procedures C12- Appendix A n Use the Fraud Exposure Rectangle n Management & Directors n Background, motivation & influence n Company relationships n Obligations, related party transactions & compliance n Nature of organization & industry n Financial results & operations n GAAP, attitude

14. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-14 Shenanigan #3- Boosting (Operating) Income n Technique #1: n Boosting income using one-time events n Selling of undervalued assets n Technique #2: n Boosting income through misleading classifications n Including investment gains in ops. income n Reducing opex by investment gains n Reclassifying balance sheet accounts

15. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-15 Shenanigan #3 Warning Signs n Turning sales proceeds into recurring income n Shifting operating expenses n Recurring “restructuring” costs n Influence misinterpretation impact on income statement

16. FORENSIC ACCOUNTING - BA124 – Fall 2010Slide 11-16 Transparency is Key n Are the #s telling the story or making the story? n Is the company managing the business or managing the #s? n What is, is? versus What is. Is! n Recall SFAC #1 n Improved decision making n Insight into future cash flows n Resource information