The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems

Chapter 13

Revenue Misstatement

It seems that revenue is all any company outsider, like investors, market analysts, and bankers, care about. They question things like how do revenues equate from quarter to quarter and what does that revenue increase mean for my dividends? And, of course, the standard: what's the bottom line? So, company executives like CEOs and CFOs are pressured to focus on revenue. For the CEO, it is a matter of the books looking “healthy” to those company outsiders. For the CFO, it is a matter of properly recognizing revenue. Remember, the CEO is operating as the face of the company to the outside world, while the CFO is the head bookkeeper and, being so, must know all the gray areas of financial reporting regulation. Although concerned with varying aspects of revenue recognition, the actions of both of these highest-of-level executives are needed in order for revenue recognition fraud to occur.

For the auditor, revenue recognition requires an understanding of the industry and the organization. The auditor needs to have the ability to apply and interpret the principles of revenue recognition to the audit program. It sounds simple; however, there are many widely accepted revenue recognition procedures and many situation-specific ways to interpret and apply each of these procedures. Just as organizations are different, the kinds of revenues they generate are different. Consequently, these different types of revenues need different recognition and reporting methods. ...