21/03/2017

21/03/2017

4 Ways To Cook The Books: Financial Statement Fraud

pot-550482_640 Cooking the books is a way businesses make things look better than they are in order to appease stakeholders. We need to look further than revenue recognition: there is a variety of ways to cook the books!

        1. Timing of revenue or expenses

  • Recognising current sales when services will not be provided for a number of years or products can be returned by a customer if not sold.
  • Delaying expenses by capitalising them or non-recurring expenses: capitalising costs and releasing to P&L when it is a current expense or one-time expenses which are meant to show the ongoing operating results, may then be reversed at a later stage.
  • Netting expenditure and other income generated in the year from ad-hoc items like selling equipment or investments or new income streams.

    2. Asset valuation

  • Fair value measurement: the value of the asset or liability goes up or down with the valuation, the measurement can be subject to manipulation through valuation models, incorrect assumptions or hiding information from independent valuers.
  • Impairments: involves fair value measurement but the signs for impairment could be ignored and the calculation not performed and no impairment loss recorded.
  • Synthetic lease: can be used to keep the cost of property off the balance sheet, the liability is not recorded for the purchase of the property because it is at the end of the lease term.

    3. Under reporting of liabilities or expenses

  • Liability omissions are most commonly associated with contingent liabilities – obligations that are created when specific events occur.
  • Deferred income and other accruals.
  • Pension liabilities.

    4. Inaccurate disclosures

  • Providing inaccurate or misleading information to confuse readers.
  • Omitting related party transactions.
  • Not providing information on important subsequent events.
  • Details of covenants.
  • Details of material future commitments.
  • Details of material estimate used.

What can you do about it?

Be diligent in reviewing the financial and non-financial reporting of your business.

Do you have any questions?

We are happy to help. Please post your comment below or call Lisa Byrne, Audit Manager at Cooney Carey, on 01 677 9000. Alternatively, send her an email: lbyrne@cooneycarey.ie 

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