Chapter 12 B: Revenue And Inventory Fraud

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  • Pepsi – Fraud was committed by employees in the United Beverage International Subsidiaries, they kept inventory of unusable and broken bottles on the books, wrote up the value of bottle inventory above cost, keeping $45 million of obsolete records on the books to satisfy the countries debt-to-equity requirementsSIMS Metal Management has launched an investigation into potential fraudulent conduct after finding the value of its British inventory had been ``materially overstated'', resulting in adjustments of about $60 million.Investors punished the world's biggest listed metal recycler following the news, sending its shares 5.01 per cent lower on the Australian market yesterday to close at $9.48.The company said the inventory in question was predominantly associated with the company's recycling solutions business at Long Marston near Birmingham in England and Newport near Cardiff in Wales.The businesses recycle electronics, including computers and televisions.
  • Chapter 12 B: Revenue And Inventory Fraud

    1. 1. Inventory-Related Financial Statement Frauds Chapter 12B
    2. 2. Outline • Learning objectives • Companies that have been involved in inventory- related financial statement fraud schemes • Inventory recording in the financial statements • Reasons for committing inventory fraud • Different types of inventory-related fraud schemes • Symptoms for detecting inventory-related fraud • Conclusion – Game!
    3. 3. Learning Objectives • Discuss inventory-related financial statement fraud schemes • Identify ways of searching for inventory- related financial statement fraud symptoms • Explain the importance of, and ways to follow up on, inventory-related fraud symptoms
    4. 4. Financial Statement Inventory Frauds
    5. 5. Types of Inventory • Merchandise Inventory • Manufacturing Inventory • Raw Materials • Work In Process • Finished Goods
    6. 6. Where Inventory Belongs in the Financial Statements • Income Statement – Cost of Goods Sold Opening Inventory + Purchases of Inventory - Closing Inventory =Cost of Goods Sold • Balance Sheet – Closing Inventory
    7. 7. Rule of Inventory Recording =Lower of Cost and Net Realisable Value
    8. 8. Effects of Inventory Overstatement on the Income Statement
    9. 9. Cost of Goods Sold Calculation
    10. 10. Reasons for Over-Stating Inventory • To overstate income. • To achieve goals. • To increase the company’s value. • To meet bank covenants. • To hide poor operational performance. • For management compensation. • To affect future acquisitions or sale of the business. • To hide the theft of inventory.
    11. 11. Identifying Inventory- Related Fraud Exposures • Double counting • Capitalizing costs that should be expensed • Cut-off problems • Overestimating problems • Bill-and-hold sales • Consigned Inventory
    12. 12. Inventory-Related Fraud Symptoms • Analytical • Accounting or Documentary • Control • Behavioural or Verbal • Lifestyle • Tips and Complaints
    13. 13. Searching for Inventory and Cost of Goods Sold Symptoms 1. Wait until you discover them by chance 2. Proactively search for them
    14. 14. Searching for Inventory and Cost of Goods Sold Fraud
    15. 15. Analytical Symptoms • Changes in record balances from period to period • Changes in relationships from period to period • Comparing information with other companies • Comparing amounts with the assets they represent
    16. 16. Accounting or Documentary Symptoms • Software • ACL • IDEA • The five W’s • Who • What • When • Where • Why
    17. 17. Control Symptoms • Look for weak controls over • Purchasing process • Receiving • Recording of liabilities • Cash disbursements • Storage • Processing • Shipping • Transferring the cost of inventory sold • Accurately tracking inventory costs • Physically observing inventory OCCURANCE - ACCURACY – COMPLETENESS – TIME PERIOD
    18. 18. Behavioural or Verbal Symptoms • Lifestyle symptoms (Not very effective) • Behavioural or verbal symptoms using: • Interviewing/enquiry • Look for inconsistencies between observations and results from inquiry of management
    19. 19. Tips and Complaints • The Nature of inventory-related fraud schemes means that often, many people must be involved • Physical goods • Brought in – handled – shipped • Talking with those personal who are in charge of handling the inventory, vendors and customers • Use inquiry methods to ask the right questions • Often people suspect something but are afraid to speak out #1 fraud detection method is investigation following a tip or complaint
    20. 20. If you were going to commit inventory related financial statement fraud, what method would you use?
    21. 21. Video-Crazy Eddie http://www.youtube.com/watch?v=Y_7ntzgTvhs
    22. 22. References • Tasker, S. J., (2013). Sims shares slashed after $60m British inventory fraud. The Australian National Daily Newspaper. Retrieved from: http://global.factiva.com.ezproxy.waikato.ac.nz/ha/default.aspx • Maher, M. W., Lansen, W. N., & Anderson, S. W., (2007). Pepsi and Old Bottles. Fundamentals of Cost Accouting 3rd Edition. Retrieved from : http://www.chegg.com/homework-help/pepsi-old-bottleswhen-fraud-pepsico- occurred-company-somewha-chapter-12-problem-36-solution-9780073527116-exc • Vona, L. W. (2011). Inventory Fraud The Fraud Audit (pp. 237-249): John Wiley & Sons, Inc.

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