Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER ELEVEN

Consolidations and Business Combinations

FRAUDULENT REPORTING INVOLVING CONSOLIDATIONS

Many financial statements include the accounts of not just one company, but of several companies. When the accounts of multiple entities are included in a single set of financial statements, the financial statements are referred to as consolidated financial statements. The purpose of preparing consolidated financial statements is to present the results of operations and the financial position of a parent entity and its subsidiaries as if the group were a single entity with multiple branches or divisions.

The determination of which entities comprise the consolidated reporting entity, then, becomes a matter involving interpretation of accounting standards. As a result, the risk of financial reporting fraud exists in two basic forms:

1. Including entities in the consolidated financial statements that do not meet the criteria for consolidation (e.g., improperly including the accounts of a profitable and financially stable entity)

2. Excluding entities from a consolidation that should be included (e.g., improperly omitting the accounts of an unprofitable or financially unstable affiliate)

Consolidation Accounting Principles

Consolidation is addressed in U.S. GAAP at ASC 810. For IFRS, new rules impacting consolidations were issued in May 2011:

1. IFRS 10, Consolidated Financial Statements

2. IFRS 11, Joint Arrangements

3. IFRS 12, Disclosure of Interests in Other Entities

4. IAS ...