Академический Документы
Профессиональный Документы
Культура Документы
2
Earnings Management
– Audit failure
– Shareholder involvement
3
Common Earnings Management Practices
4
Common Earnings Management Practices (cont’d): J.E.
Actual J.E. Proper recognition J.E.
1. Borrowing DR CR DR CR
revenues from the Cash revenue cash def. revenue
future later: def. revenue revenue
2. Deferring DR CR DR CR
expenses to the Asset cash expense cash
future later: Expense asset
3. Deferring DR CR DR CR
revenue to the cash def. Cash revenue
future revenue
later: def. revenue revenue
4. Exaggerating DR CR DR CR
current loss No journal entry
expenses/losses liability/Asset later: loss cash
to create cookie 5
later: liability cash
jar
Common Earnings Management Practices (cont’d)
7
Xerox Case: what were the incentives?
Without the accounting scheme the company would have
missed Wall Street's consensus per-share earnings targets
in 11 of 12 quarters from 1997 to 1999.
Accounting scheme helped keep Xerox's stock price
artificially high in the late 1990s so executives could cash
in $5 million in performance-based compensation and
more than $30 million from stock sales.
8
9
Satyam – Rs.7000 crore scam
The 2008 balance sheet comprised faked and
inflated figures of revenue, profit, interest
and debt. The list includes Rs 5,040 crore of
non-existent cash and bank balances, non-
existent accrued interest, understated
liability of Rs 1,230 crore on account of
funds raised by Mr Raju and overstated
debtors position of Rs 490 crore (as against
Rs 2,651 crore).
10
Window Dressing
Ways of Window Dressing
Premature recognition of Income
Non-operational Income
Non-provision of diminution in LT
investments
Capitalisation or deferment of revenue
expenses
Revaluation of fixed assets
Extension of accounting year
Reducing from Reserves & Surplus
Ways to Window dress
Advancing bills of customers to inflate the
bottom line or top line
Inadequate or no provision for doubtful
debts
Increase estimated useful life to charge
lower depreciation
No separate disclosure for prior-period
adjustments / extra-ordinary items
Forensic Accounting
15
Forensic Accounting Defined
16
Forensic Accounting vs. Fraud Auditing
17
Forensic Accounting vs. Fraud Auditing
Forensic Accountant: A forensic accountant
may take on fraud auditing engagements and
may be a fraud auditor, but he or she will also
use other accounting, consulting, and legal
skills in broader engagements. In addition to
accounting skills, he or she will need a
working knowledge of the legal system and
excellent communication skills to carry out
expert testimony in the courtroom and to aid
in other litigation support engagements.
18
Defining Fraud
A representation
About a material point,
Which is false,
And intentionally or recklessly so,
Which is believed
And acted upon by the victim
To the victim’s damage
19
What Drives Fraud
Key drivers
– Confidence earned
– Pressures
– Greed
20
Accountant’s Role in Fraud Detection
In the early 1980s, companies began to use
computers to perform their record keeping
Intense competition caused auditing fees to fall
as much as 50% from the mid-1980s to the mid-
1990s.
Auditors cut costs by reducing the process of
reviewing hundreds of corporate accounts. They
grew more reliant on internal controls.
21
Accountant’s Role in Fraud Detection
Top executives were able to circumvent internal
controls and manipulate the records.
This lead to situations such as Enron,
WorldCom, Xerox, Adelphia Communication,
and the fall of Arthur Andersen in the early
2000s.
22
23
24
Forensic Accounting
Two parts:
– Investigative accounting
– Litigation support
Treats all figures as suspect until proven
otherwise
25
Investigation
Is the act of determining whether criminal
matters such as employee theft, securities
fraud (including falsification of financial
statements), and insurance fraud have
occurred.
Also includes searching for irregularities
associated with civil matters, such as a
search for hidden assets in divorce cases.
26
Litigation Support
Is the factual presentation of economic
issues related to existing or pending
litigation.
27
Litigation Support
Arbitration assistance
Business valuation for divorce, stockholder disputes
Computation of damages resulting from personal injuries,
wrongful death, breach of contract, casualty, and fidelity
losses
Determination of lost profits due to business interruption
Testifying as an expert witness
Financial review of contractual obligations
Investigative services related to fraud and other illegal acts
28
Red Flags
No Company Policy Manual Handwritten checks
Feeling of disorganized Extensive fund transfers
bookkeeping, purchasing, receiving, Unusual transactions (inconsistent)
and/or warehousing departments Deficient hiring policies and procedures
Missing documents Employees’ lifestyles inconsistent with
Unrecorded transactions salaries
Employees who don’t take vacations
No bank reconciliations
SPEs
Subsidiary ledgers out of balance Excessive insider sales of stock
No physical inventory counts Unexplained resignations of upper
Checks written to cash management
Large related party loans Excessive debt/equity ratio
Excessive other revenue CPA switching
Negative operating cash flow Strange account titles
Downward earnings trend
29
The Fraud Triangle
Motive / Pressure
Rationalization Opportunity
[Source: Michael Kurland, How to Solve A Murder: Macmillan, 1995, pp. 7-8]
30
Perceived Pressure
Employees, managers, and owners can feel
pressure to commit fraud as a result of
31
Perceived Opportunities
Opportunities to commit fraud exist when
levels of trust in an organization are reached
or when controls are weak.
32
Rationalization
Individuals usually don’t commit fraud unless
they can justify their actions in relation to
their own code of ethics.
33
Factors affecting occupational Fraud
Financial condition of the Personal traits and
organisation characteristics of
Pressure to show profits in executives and employees
the marketplace Reward systems for
Internal accounting ethical behavior
controls Organisation culture and
The state of the economy dynamics
Integrity level of corporate Peer pressure
leaders and employees The perception of
Commitment to detection
organisation’s value The swiftness, cnrtainty
system and severity of
punishment
34
How do Forensic Accountants
Search for Fraud?
35
Proactive Fraud Detection
Inductive approaches
Use of Data-mining software
Digital analysis of company data
Deductive approach
Determine what kinds of frauds can
occur. Search for symptoms of these
frauds.
36
Data-mining Softwares
Excel
ACL
IDEA
Microsoft Access
37
Deductive Approach to Detecting Fraud
Involves a 5-step process:
Understanding the business environment
Understanding the kinds of fraud that can occur in
this environment
Determining the most likely symptoms
Using databases and systems to search for the
fraud symptoms
Following up on discoveries to determine
likelihood fraud exists
Source: Albrecht, W. S. 2003. Fraud Examination. Mason, OH: Thomson South-Western
38
Reactive Fraud Detection
39
Corporate Governance
40
What is Corporate Governance?
A set of procedures and policies by which corporations are directed and
controlled.. Cadbury Report (UK) – 1992
“…to do with Power and Accountability: who exercises power, on behalf of
whom, how the exercise of power is controlled.”…. Sir Adrian Cadbury
As per OECD, Corporate Governance deals with “… the distribution of rights
and responsibilities among different participants in the corporation, such as,
the board, managers, shareholders and other stakeholders, and spells out rules
and procedures for making decisions on corporate affairs “
Corporate governance deals with the ways in which suppliers of finance to
corporations assure themselves of getting a return on their
investment….Journal of Finance, Shleifer and Vishny
Corporate governance is about promoting corporate fairness, transparency and
accountability
An Indian Definition
“…fundamental objective of corporate
governance is the ‘enhancement of the
long-term shareholder value while at the
same time protecting the interests of other
stakeholders.”
TRANSPARENCY &
COMMUNICATION
RESPONSIBILITY
PHILANTHROPY
CITIZENSHIP
INTEGRITY
GIVING -
SOCIAL
TRUST
ETHICS
GUIDING TENETS
CAUX / SULLIVAN / GLOBAL COMPACT / MILLENIUM DEVELOPMENT GOALS /
INDIAN TRADITIONS