A Guide to Forensic Accounting Investigation, 2nd Edition

Chapter 23

Financial Statement Fraud: Other Schemes and Misappropriations

Jonny J. Frank, David Jansen, and Michael Carey

Alongside the well-populated universe of improper revenue recognition schemes is a parallel universe of asset overstatement and liability understatement, in which fraudulent schemes also abound. A direct relationship exists between overstatement of assets and understatement of liabilities and expenses, as many recent financial frauds have demonstrated. Among the most common financial statement frauds in these areas are the following: manipulating management estimates; creating fictitious assets; manipulating the balances of legitimate assets, particularly investments, with the intent to overstate value; understating liabilities or expenses; failing to record or deliberately underestimating accrued expenses, environmental or litigation liabilities; restructuring reserves; misstating intercompany expenses; and manipulating foreign exchange transactions.

ASSET MISSTATEMENTS

Aside from accounts receivable, discussed in Chapter 22, inventory is one of the most misstated assets, and cash is the most often misappropriated. Among the other types of assets commonly misstated are investments, fixed assets, leased assets, research and development costs, software development costs, advertising costs, and interest costs. Very often, the easiest way for a fraudster to accomplish his objective is to manipulate management estimates of value, reserves, or provisions.

Inventory ...