Financial Statement Fraud: Strategies for Detection and Investigation

PART ONE

Revenue-Based Schemes

SIXTY-ONE PERCENT of the financial statement frauds studied in connection with the 2010 report, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies , from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) involved misstatements of revenue, making this the single most common category of financial statement fraud. This statistic has been rather consistent over time. In an analysis of SEC AAERs issued from 1982 to 2005, it was reported by Dechow, Ge, Larson, and Sloan that 54 percent of 676 misstatements involved incorrect reporting of revenue.

Since accounting inherently involves two sides to every transaction, when a revenue account is misstated, some other account is likely to be misstated as well. The schemes covered in this part of the book, however, are driven by a desire by the perpetrators to misstate revenue. The other accounts that are affected may be assets, liabilities, expenses, or even other revenue accounts. But, the motive behind the schemes described in this part is to misstate one or more revenue accounts.