Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER SEVEN

Asset Valuation Schemes

FICTITIOUS ASSETS

Let's start with the simplest method of inflating the value of assets—by reporting assets that a company does not even own. Verifying that assets reported by a company are actually owned by that company and not by some other party is an essential part of any audit. But, it is also one that has slipped through the cracks during some audits. A company must own and control an asset in order to report it on its balance sheet. If the asset is owned by another entity, a related party for example, the asset should not be included in the balance sheet.

Supporting documentation for assets should verify the ownership of an asset. One of the more remarkable overstatements of assets involved Parmalat Finanziaria S.p.A., an Italian seller of dairy products. Parmalat was charged with overstating its 2002 reported assets by at least €3.95 billion. The company claimed to hold this amount in cash and marketable securities in an account at Bank of America in New York City in the name of Bonlat Financing Corporation, a wholly owned (and, therefore, consolidated) subsidiary incorporated in the Cayman Islands. Bonlat's auditors confirmed the account with Bank of America—or so they thought. The assets did not exist and the confirmation had been forged. Yet the purported balance in this account was included in the audited financial statements.

INVENTORY VALUATION SCHEMES

In Chapter 6, schemes involving improper capitalization of costs incurred ...