Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER FOURTEEN

Disclosure Fraud

PRIOR TO READING ANY FINANCIAL STATEMENTS, readers should always consider the valuable information provided in the notes to the financial statements. The same can be said for fraud investigators—study the notes. The notes may be a source of a financial statement fraud, but they may also provide useful clues about other fraud that affects amounts reported in the financial statements.

A thorough description of the disclosure requirements, and the associated red flags of fraud, would require a voluminous text of its own. So, the approach taken in this book is to provide a framework for evaluating note disclosures and to explore only a handful of the most likely suspects in the category of disclosure fraud.

There are four general types of notes that can be found in the financial statements:

1. Policies. Many of the notes, usually some of the first ones following the core financial statements, provide information about the accounting policies and methods used in preparing the financial statements. These notes provide answers to some of the most important questions associated with evaluating statements for the risk of fraud. For instance, what inventory flow model does the company utilize? For which assets has an election been made to carry at fair value? What are the ranges of useful lives used in depreciating and amortizing property and equipment and intangible assets? What methods are utilized in the recognition of revenue?

2. Composition of accounts. ...