REVENUE- RELATED FINANCIAL
STATEMENT FRAUDS
Chapter 12 A
Julien Hachet
09/09/2013
1
OUTLINE
 Key points
 A Major Issue
 Causes
 The Sunbeam Corporation Case
 Possible Fraud Schemes
 Identification of ...
KEY POINTS
 Identification of revenue-related financial statement
fraud schemes.
 Ways to search for symptoms of revenue...
A MAJOR ISSUE
 In case of financial statement frauds, the most
frequently manipulated accounts are revenues
and/or receiv...
CAUSES
 Existence of alternatives for revenue recognition
 Conservative vs. Liberal accounting methods
 Easy to manipul...
THE SUNBEAM CORPORATION CASE (1/2)
 Home appliances maker created in 1910,
 Decline in the 1990’s,
 Albert John Dunlap ...
THE SUNBEAM CORPORATION CASE (2/2)
 New CEO did not succeed the way he thought,
 Started creating « cookie jar » reserve...
POSSIBLE FRAUD SCHEMES (1/2)
 Fictious sales recording
 Related parties transactions
 Sales with side agreements
 Cons...
POSSIBLE FRAUD SCHEMES (2/2)
 Overstate real sales:
 Contracts alterations,
 Inflated amounts,
 Not record returned go...
IDENTIFICATION OF REVENUE-RELATED
FRAUD SYMPTOMS
 Fraud being rarely observed,
 We have to heavily rely on symptoms,
 w...
1. ANALYTICAL SYMPTOMS
 Low sales discounts,
 Low sales returns,
 Low allowance for doubtful accounts,
 Low cash colle...
2. DOCUMENTARY SYMPTOMS
 Unsupported or unauthorized revenue-related
balances or transactions,
 Significant unexplained ...
3. CONTROL SYMPTOMS
 Management override of significant internal control
activities,
 New, unusual or large customers th...
4. BEHAVIORAL OR VERBAL SYMPTOMS
 Inconsistent, vague or implausible responses from
employees or management,
 Denied acc...
5. LIFESTYLE SYMPTOMS
 Major sale of company stock at unusual dates:
 Around earnings releases,
 Significant bonuses ti...
6. TIPS AND COMPLAINTS
 Tips or complaints from the company whistle-
blowing system or any other way,
 Fraud disclosure ...
KEY POINTS REMINDER
 Numerous revenue- and inventory related frauds,
 Many transaction can be used,
 Overstate (or unde...
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Chapter 12:Revenue and Inventory Fraud by J Hachet

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Chapter 12:Revenue and Inventory Fraud by J Hachet

  1. 1. REVENUE- RELATED FINANCIAL STATEMENT FRAUDS Chapter 12 A Julien Hachet 09/09/2013 1
  2. 2. OUTLINE  Key points  A Major Issue  Causes  The Sunbeam Corporation Case  Possible Fraud Schemes  Identification of Revenue-Related Fraud Symptoms 2
  3. 3. KEY POINTS  Identification of revenue-related financial statement fraud schemes.  Ways to search for symptoms of revenue-related financial statement fraud.  Importance of, and ways to follow up on, revenue- related fraud symptoms. 3
  4. 4. A MAJOR ISSUE  In case of financial statement frauds, the most frequently manipulated accounts are revenues and/or receivables accounts.  According to a Committee of Sponsoring Organizations’ study, more than 50% of financial statements frauds involve revenue and/or account receivable accounts. 4
  5. 5. CAUSES  Existence of alternatives for revenue recognition  Conservative vs. Liberal accounting methods  Easy to manipulate Net Income using Revenues and Receivables,  Very high pressure put on management by financial markets. 5
  6. 6. THE SUNBEAM CORPORATION CASE (1/2)  Home appliances maker created in 1910,  Decline in the 1990’s,  Albert John Dunlap appointed CEO in July 1996  Famous for having successfully resstructured several companies 6
  7. 7. THE SUNBEAM CORPORATION CASE (2/2)  New CEO did not succeed the way he thought,  Started creating « cookie jar » reserves in 1996  Forbidden by the SEC,  To simulate a rapid turnaround in 1997,  Result: $189 million earnings in 1997 for Dunlap. 7
  8. 8. POSSIBLE FRAUD SCHEMES (1/2)  Fictious sales recording  Related parties transactions  Sales with side agreements  Consignment sales  Round tripping  Premature revenue recognition  Improper cutoff  Holding books open after the close of the reporting period 8
  9. 9. POSSIBLE FRAUD SCHEMES (2/2)  Overstate real sales:  Contracts alterations,  Inflated amounts,  Not record returned goods from customers,  Record returned good after the end of the reporting period,  Write off uncollectible receivable in a later period,  Not record discounts given to customers. 9
  10. 10. IDENTIFICATION OF REVENUE-RELATED FRAUD SYMPTOMS  Fraud being rarely observed,  We have to heavily rely on symptoms,  which can be divided into six categories. 10
  11. 11. 1. ANALYTICAL SYMPTOMS  Low sales discounts,  Low sales returns,  Low allowance for doubtful accounts,  Low cash collected compared to revenues,  Unusual last-minute entries,  Change in the mix or type of revenues,  Sales of assets similar to subsequent purchases at similar amounts… 11
  12. 12. 2. DOCUMENTARY SYMPTOMS  Unsupported or unauthorized revenue-related balances or transactions,  Significant unexplained items on bank reconciliation,  Revenue-related ledgers that do not balance:  Sales,  Cash receipts,  Nonstandard journal entries posted by top management:  Top-side journal entries,  Nonstandard journal entries posted during weekends, late at night or during holidays. 12
  13. 13. 3. CONTROL SYMPTOMS  Management override of significant internal control activities,  New, unusual or large customers that have not gone through the customer-approval process,  Weaknesses in the cutoff process. 13
  14. 14. 4. BEHAVIORAL OR VERBAL SYMPTOMS  Inconsistent, vague or implausible responses from employees or management,  Denied access to facilities, employees, records, customers or vendors,  Undue time pressure imposed by management to solve complex issues 14
  15. 15. 5. LIFESTYLE SYMPTOMS  Major sale of company stock at unusual dates:  Around earnings releases,  Significant bonuses tied to meeting earnings forecasts,  Executives’ personal net worth tied up in company stock. 15
  16. 16. 6. TIPS AND COMPLAINTS  Tips or complaints from the company whistle- blowing system or any other way,  Fraud disclosure at companies with which this company does significant business. 16
  17. 17. KEY POINTS REMINDER  Numerous revenue- and inventory related frauds,  Many transaction can be used,  Overstate (or understate) Net Income by:  Mistating revenue,  Focusing on Analytical symptoms is the best way to discover fraud schemes. 17
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