Chapter 13 - In what ways could financial statement fraud

Chapter 13

10. In what ways could financial statement fraud result from a merger?

When two firms merge, there are specific accounting rules that dictate at what amounts acquired assets should be recorded. Sometimes, merged companies manipulate these rules to overstate the assets of the combined company and thus commit financial statement fraud. Another type of merger-related fraud is to overstate merger reserves and then reverse those charges into income or to hide operating expenses in the merger reserve.

12. What are the four kinds of analysis that can be used in searching for analytical fraud symptoms?

Method 1: Focusing on changes in recorded balances from period to period.

Method 2: Focusing on changes in relationships from period to period (one of the best ways to detect understatement of liability frauds).

Method 3: Comparing financial statement information with other companies.

Method 4: Comparing financial statement amounts with assets they are supposed to represent or with nonfinancial statement factors.

Short Case 10

1. What were the main types of financial statement fraud committed at Cutter and Buck? Do these types of fraud occur often?

The main type of financial statement fraud committed at Cutter and Buck was revenue recognition. Cutter and Buck improperly recognized revenue of $5.7 million in shipments to distributors functioning as company warehouses and later concealed the improper transactions from the auditors, board of directors, and shareholders. Improper revenue recognition is the most common type of financial statement fraud.

2. What should have been the appropriate accounting treatments?

The shipments were made on a consignment basis since distributors had no obligation to pay for the goods. Thus, shipments should not have been recorded as sales until the distributors had resold the merchandise.

3. The three parts of the fraud triangle are pressure, opportunity, and rationalization. List some of the pressures that may have led to this fraud. Some of the pressures that may have led to this fraud are declining sales, tough competition, slow economy, shareholders who demand a higher stock return, and threat to management of being fired or demoted.