FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 10-1

1
Todays Topics

• Transparency Barriers
• Nature of Financial Fraud
• Detection of Financial Fraud

2
Barriers to Transparency

• Transparency defined
• WYSIWYG
• Management bias
• Measurement bias

3
The 7 Shenanigans-Revisited

• Premature recording of revenue
• Bogus revenue
• One time recurring gains
• Shifting current expenses
• Unrecorded liabilities
• Revenue shifting
• Shifting future expenses

4
Financial Fraud Statistics

• Key players
• COSO
• The Treadway Comm.-NCFFR
• SECs AAERs
• Accounting Auditing Enforcement Releases
• Treadway Commission 1987
• Infrequent but costly
• COSO Update 1999
• 300 AAERs 1987-1997

5
18 Key Tidbits

• Average period 23.7 months
• Revenue frauds were 1
• Asset misstatement-spread around
• Mean misstatement 25 M
• CEO involved in 72 of the cases
• Last audit was unqualified in 55 of the cases
• Mean assets 532 M revenues 232 M
• S/W and manufacturing involved in 12 of the
  cases
• NASDAQ had 78
• 36 filed for bankruptcy
• Non-existent or uninvolved audit committees
• Insiders on Boards of Directors
• Family relationships were common
• Financial pressures were high
• 56 of auditors were Big 6
• Auditors named in 30 of cases
• 25 changed auditors after the fraud
• Relatively few executives went to prison

6
Financial Fraud Motivation

• Greed
• Fear of failure
• Lack of accounting expertise
• Scope of operationstoo broad

7
Financial Fraud Detection

• KTT is the key
• Use the Fraud Exposure Rectangle
• Management Directors
• Background, motivation influence
• Company relationships
• Obligations, related party transactions
  compliance
• Nature of organization industry
• Financial results operations
• GAAP, attitude