24: Management Fraud

Characteristics of Management Fraud
Usually several individuals are involved in the creation of fraudulent statements, such as profit manipulation or balance sheet manipulation.
If Revenues Are Overstated:
Assets may be overstated, liabilities may be understated, and equity can be understated.
Ways to Overstate Revenues
Recording fictitious sales, recording valid transactions more than once, recording unearned revenue or consignments as sales, or recording sales when the chance of return is likely.
If Expenses Are Understated:
Assets can be overstated (A/R, Inv, etc.), liabilities can be understated, and equity can be understated.
Ways to Understate Expenses
Capitalizing expenditures rather than expensing, failing to record expenditures, overstating raw materials or WIP, and understating purchases.
Methods for Inventory Fraud
Recording nonexistent items, not removing goods sold from inventory, duplicating the recording of inventory, including scrap/waste as inventory, creating false invoices or journal entries and inflating inventory costs.
Traits of Fraud Managers
Wheeler-dealers, feared by employees, impulsive, too numbers-oriented, and insensitive to people, especially employees.
Red Flags for Management Fraud
Diminishing cash flow, diminishing sales and income, increasing A/R and A/P, unusual or second endorsements on checks, increasing inventory and cost of sales, large number of period-end adjusting entries, and excessive voids or refunds.
4 Way of Analyzing Financial Data
1) Comparing account balances across periods, 2) Calculating key ratios across periods, 3) Performing vertical analysis, 4) Performing horizontal analysis.
Vertical Analysis
Shows if relationships among accounts have changed.
Horizontal Analysis
Looks at percentage change in each account between periods.
Involves an executive, manager, or employee of the organization in collusion with an outsider.
Involves giving, offering, or receiving things of value to influence an official in the performance of his or her lawful duties.
Illegal gratuity
Involves giving, receiving, offering, or soliciting something of value because of an official act that has been taken.
Conflict of Interest
Occurs when an employee acts on behalf of a third party during the discharge of his or her duties or has self-interest in the activity being performed.
Economic Extortion
The use (or threat) of force (including economic sanctions) by an individual or organization to obtain something of value.

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