This document discusses revenue-related financial statement fraud. It begins by outlining key points and noting that over 50% of financial statement frauds involve revenue and receivables accounts. Common causes of this type of fraud include pressure to meet financial targets and easy manipulation of net income through revenues. Symptoms of revenue fraud are then categorized into six groups: analytical, documentary, control, behavioral, lifestyle, and tips/complaints. The Sunbeam Corporation case is provided as an example where a CEO created "cookie jar" reserves and overstated earnings.

1. REVENUE- RELATED FINANCIAL
STATEMENT FRAUDS
Chapter 12 A
Julien Hachet
09/09/2013
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2. OUTLINE
 Key points
 A Major Issue
 Causes
 The Sunbeam Corporation Case
 Possible Fraud Schemes
 Identification of Revenue-Related Fraud Symptoms
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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.
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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.
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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.
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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
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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.
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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
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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. IDENTIFICATION OF REVENUE-RELATED
FRAUD SYMPTOMS
 Fraud being rarely observed,
 We have to heavily rely on symptoms,
 which can be divided into six categories.
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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…
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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.
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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.
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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
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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.
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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.
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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.
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