Accounting For Dummies®, 4th Edition

15.5. Discovering Fraud, or Not

Massaging the numbers is one thing. Accounting and financial reporting fraud, also called cooking the books, is another thing altogether. Accounting fraud refers to such schemes as recording sales revenue for products and services that have not been sold, not recording expenses that have been incurred, recording gains that have not and probably will not be realized, and not recording losses that have been sustained. Financial reporting fraud encompasses accounting fraud; it also includes failing to disclose negative matters that should be disclosed in a financial report or making deliberately misleading disclosures in a financial report.

The track record of CPA auditors in discovering accounting and financial reporting fraud is not very good. The number of well-known companies that engaged in accounting and financial reporting fraud in recent years that was not discovered by their CPA auditors is truly staggering. The best known of these companies was Enron, but hundreds of companies committed accounting fraud. Enron is also infamous for the reason that its auditor, Arthur Andersen & Company, was found guilty of obstruction of justice because its senior staff persons on the audit destroyed audit evidence. Almost overnight this venerable CPA firm ceased to exist. Over the years, I had attended several faculty workshops held by Arthur Andersen, and ...