A POWER POINT PRESENTATION ON SCHEMES OF FINANCIAL STATEMENTS FRAUDS WHICH MAY BE OF HELP TO FRAUD EXAMINER

1. FINANCIAL
STATEMENT FRAUD
SCHEMES
PRESENTED BY:
CA. RATAN KUMAR AGARWALA
MEMBERSHIP NO. 055488,

2. Financial Statements- meaning
A collection of reports
i. about an organization’s financial results for a particular period
ii. about the financial condition of a business at a particular point of time
iii. about cash flows of the organization during a particular period
iv. containing full and proper disclosures of significant facts and information

3. FRAUD
An intentional act of deception, concealment,
omission or pervasion of truth with an intent to
gain wrongful gain or advantage or to cause
wrongful loss to somebody else or to cause injury
to other

4. FINANCIAL STATEMENT FRAUDS
Deliberate misrepresentation
of
data and information
in
FINANCIAL STATEMENTS
with an intent to
misled the user
and thus creating a
wrongful impression
of
financial health

5. OBJECTIVES BEHIND FINANCIAL
STATEMENTS FRAUDS
i. To make performance better than actual (to entice investments
and loans)
ii. To make performance look worse than actual (to lower the tax
liabilities)

6. PERPETRATORS OF FINANCIAL
STATEMENTS FRAUDS

7. REASONS OF FINANCIAL STATEMENTS FRAUDS

8. SCHEMES OF FINANCIAL STATEMENTS FRAUDS

9. TIME MANIPULATIONS

10. EARLY RECOGNITION OF REVENUES
Recording a sale pending supply
Recording sale pending finalisation
Recording a sale even when sent on consignment
Recognising in full the activation fees without amortisation
Recording revenue in multiple element contract where there is
undelivered element of supply

11. POSTPONMENT OF EXPENSES
Recording of expenses only on payment and not on accrual basis
Large revenue expenses are capitalized
Higher amortization period than appropriate
Showing higher useful life of fixed asset than appropriate thereby
reducing the charge of depreciation

12. ENTRY FALSIFICATION OR ENTRY MANIPULATION

13. Manufacture of transactions
that appear to be sales
Classifying other receipts as
sales
Fictitious sales to existing customers
•
Fictitious sales to fictitious customers
•

14. MANIPULATING LIABILITIES AND EXPENSES
SHOWING SHORT
TERM LIABILITY AS
LONG TERM OR VICE
VERSA
CAPITALISATION
OF
CURRENT
EXPENSES TO
FIXED ASSETS
OLD BOOK DEBTS
STILL CARRIED IN
BOOKS
WRITING OF
LIABILITIES TO
INCOME
ADJUSTING
EXPENSES
AGAINST
RESERVES
NON RECOGNITION
OF LIABILITIES FOR
UNPAID EXPENSES
THOUGH INCURRED

15. MANIPULATING THE VALUE OF ASSETS
INVENTORY
VALUATION AT
HIGHER PRICE THAN
ACTUAL FOR CORRECT
QUANTITY
INVENTORY
VALUATION AT
HIGHER QUANTITY
THAN ACTUAL FOR
CORRECT RATE
CLASSIFYING LONG
TERM INVESTMENT
AS SHORT TERM
INVESTMENT
NON
ADJUSTING
FALL IN
INVESTMENTS
VALUE
CAPITALISING
REVENUE
EXPENSES TO
FIXED ASSETS
INVETSMENT IN
SISTER COMPANIES
CLASSIFIED AS
ADVANCE TO
OTHER PARTIES

16. NON DISCLOSURE OR IMPROPER DISCLOSURE
LIABILITY OMISSIONS-
NON-DISCLOSURE OF
LOAN COVENANTS OR
CONTINGENT
LIABILITIES
EVENTS
OCCURING AFTER
THE BALANCE
SHEET DATE:
AVOID
JUDGEMENTS OF
COURTS ETC.
MANAGEMENT
FRAUDS-NON
DISCLOSURE
RELATED PARTY
TRANSACTIONS-
SELF DEALING IF
NOT AT ARM’S
LENGTH PRICE
ACCOUNTING
CHANGES-CHANGE IN
ACCOUNTING
PRINCIPLES,
ESTIMATES AND
REPORTING ENTITIES
LYING TO AUDITORS

17. WARNING SIGNS OR RED FLAGS IN FINANCIAL STATEMENTS FRAUD
1. SINGLE PERSON
DOMINION IN
MANAGEMENT
4. RESTRICTION ON AUDITORS
ACCESS TO PEOPLE AND/OR
INFORMATION
2. INEFFECTIVE
COMMUNICATION
5. RAPID GROWTH OF
PROFITABILITY AS COMAPARED
TO OTHER COMPANIES IN SAME
LINE
3. RECURRING NEGATIVE
CASH FLOWS
6. HIGHLY COMPLEX
TRANSACTIONS PARTICULARY
THOSE CLOSE TO PERIOD END
7. SIGNIFICANT RELATED PARTY
TRANSACTIONS NOT IN THE
ORDINARY COURSE OF
BUSINESS
8. SIGNIFICANT BANK ACCOUNTS
OR BRANCH OPERATIONS IN TAX
HOLIDAY ZONES WITH NO CLEAR
BUSINESS CONNECTIONS
9. HISTORY OF VIOLATION
OF LAWS AND
REGULATIONS
10. ATTEMPTS TO JUSTIFY
INAPPROPRIATE ACCOUNTING
11. UNUSUAL GROWTH IN DAY’S
SALES IN RECEIVABLES
12. SALES RECORDED AT
HEADQUARTERS WHICH DO NOT
DO DIRECT SALES
13. FREQUENT WRONG
CLASSIFICATIONS
14. UNUSUAL FINANCIAL
RATIOS
15. CONSISTENT HIGHER
LIABILITIES THAN ASSETS

18. DETECTION AND/OR PREVENTION OF FINANCIAL STATEMENT FRAUD
1. TONE AT THE TOP-
STRONG ETHICS AND
STRICTNESS
4. QUESTION ABOUT
CHANGES IN AUDITORS
2. EFFECTIVE WHISTLE
BLOWER PROGRAMME
5. HAVE SKEPTICS ON
THE BOARD OF
DIRECTORS
3. QUESTION FINANCIAL
RESULTS THAT ARE
ALWAYS ON TARGETS
6. QUESTION
EXTRAORDINARY OR
COMPLEX TRANSACTIONS
7. ANALYSE ACCOUNTS
RECEIVABLES-RELATIVE
SIZE FACTOR ANALYSIS
8. QUESTION THE
MISMATCH OF CASH
GENERATION WITH
REVENUE
9. ANALYSIS OF SWING IN
ASSETS AND/OR
LIABILITIES

19. THE BENEISH MODEL

20. THE EIGHT VARIABLES IN BENEISH
MODEL

21. CONCLUSION