Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER NINE

Shifting Expenses to Future Periods

TIMING SCHEMES INVOLVING LIABILITIES

One of the simplest methods of improving profits is to fail to record a liability for an expense that has been incurred by an entity. One of the basic concepts behind accrual accounting is the recognition of an expense when the expense has been incurred and the benefits received. When a company postpones recognition of an expense until it pays a vendor, the company is practicing a cash basis of accounting, which does not conform to U.S. GAAP or IFRS.

Thus, auditors and investigators should always be on the lookout for a company attempting to postpone recognition of expenses until a future period rather than accruing a liability for those costs in the current period.

ACCOUNTS PAYABLE

The most common liability that is underreported in an attempt to improve a company's balance sheet is accounts payable. Auditors perform a search for unrecorded accounts payable by analyzing disbursements made subsequent to year-end. The supporting documentation for these disbursements is examined for signs that the underlying goods or services were delivered prior to the end of the year and, therefore, subject to a requirement to accrue them as liabilities on the balance sheet at year-end.

Techniques that may be utilized to omit accounts payable from the balance sheet include the following:

• Hiding invoices for goods and services received prior to year-end from the auditor and waiting until after the audit is completed ...