Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER TWELVE

Financial Reporting Fraud as a Concealment Tool

UP TO THIS POINT, all of the financial statement fraud schemes explained have been the primary tool in the perpetration of a fraud. But in some cases, the falsification of the financial statements is secondary to the primary fraud. In these cases, the perpetration of financial statement fraud is done in order to conceal some other fraud or illegal act.

In this chapter, the two most common applications of financial statement fraud as a concealment weapon are explained:

1. As a method of concealing asset misappropriations

2. As a method of concealing illegal acts

FINANCIAL STATEMENT FRAUD TO CONCEAL ASSET MISAPPROPRIATIONS

One reason for perpetrating financial statement fraud is the concealment of asset misappropriations. Asset misappropriations are more likely to be carried out by higher-level individuals, such as senior finance personnel or other senior managers, who may be in a position to disguise their theft in the accounting records.

Let's examine two cases to illustrate this fraud risk.

The first case involves UCI Medical Affiliates, Inc. (UCI). Between 2003 and 2008, UCI's former executive vice president and CFO embezzled $2.97 million, according to a 2009 action filed by the SEC. He carried out the asset misappropriation primarily using three methods:

1. Charging personal purchases on UCI's corporate credit card, followed by arranging for UCI to pay the credit card statement by check

2. Preparing false expense ...