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• eBook-Kapitel aus dem Buch Accounting Fraud

  Introduction

  Professor Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …2009, pp. 2–3): – There is an alarming tolerance of unethical behaviour. When asked whether they considered unethical behaviour to be acceptable to… …, in order to boost sales figures or net income. In an effort to meet analysts’ expectations, management intervenes in the reporting of its own… …target (which may be set by management or may be a forecast made by analysts) � Often including income smoothing (pre-determined target is an amount… …accounting principles done in an effort to achieve desired results (typically higher earnings) whether the practices followed are in accordance with GAAP or… …fraudulent by an adminis- trative, civil, or criminal proceeding (such as that of the SEC, or a court) Accounting Irregularities � Term used interchangeably… …to the area of fraud. External auditors, operating in an envi- ronment impacted by the Sarbanes-Oxley Act, are expected to have, at a minimum… …in real life and create an authentic learning environment. When students engage with cases, active learning takes place: they apply knowledge, and… …they also perform evaluation, reasoning and problem solving. For many teachers, the case method is much more than just an- other methodological option… …cases, each containing special lessons to be learned about accounting fraud and how an auditor can go about finding such fraud. The cases summarize the… …persons involved. The real people, companies and events of each case provide read- ers with an understanding that accounting fraud may have far-reaching…

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• eBook-Kapitel aus dem Buch Accounting Fraud

  Case 1: McKesson & Robbins (1938)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …findings, Musica accused him of “trying to wreck the company”. On December 6, 1938, the SEC opened an investigation into the accounting prac- tices…
• eBook-Kapitel aus dem Buch Accounting Fraud

  Types of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …misappropriation schemes are frauds in which the perpetrator steals or mis- uses an organization’s resources. Although internal theft and embezzlement are commonly… …used, asset misappropriation is a more encompassing term. An em- ployee who wrongly uses company equipment for his own personal benefit has not “stolen”… …Skimming Cash is stolen from an organization before it is recorded on the organization’s books and records - Employee collects payment from a customer… …but does not record the sale Cash larceny Cash is stolen from an organization after it is recorded on the organization’s books and records -… …Payroll schemes An employee causes his employer to issue a payment by making false claims for compensation - Employee claims overtime for hours not… …worked - Employee adds ghost employees to the payroll Expense reimburse- ment schemes An employee makes a claim for reimbursement of fictitious or… …An employee steals his employer’s funds by forging or altering a check on one of the organization’s bank accounts, or steals a check the… …organization has legitimately issued to another payee - Employee steals blank company checks and makes them out to himself or an accomplice - Employee… …steals outgoing check to a vendor and deposits it into his own bank account Register disbursements An employee makes false entries on a cash… …misappropriations (“inventories and all other assets”) Any scheme in which an employee steals or misuses non-cash assets of the victim organization -…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …indicate the occurrence of fraud or an in- creased likelihood thereof. Red flags should therefore, when encountered, trigger a higher level of… …professional scepticism. The aim of this schedule is to act as an aid to all anti-fraud-practitioners when considering fraud risk mitigation initiatives… …– An interest in employing inappropriate means to minimize taxable income – Undue concern with the need to improve the image/reputation of the entity… …– Entries made by individuals who do not typically make entries (e.g., an entry made by the CEO or CFO that typically would be made by lower-level… …Entries made to account pairings that appear unusual, such as a debit entry to an asset account and a credit entry to an expense account – Entries having… …descriptions that include a phrase implying that an entry was made at the direction of a superior (such as “per Mary Jones”, “as indicated by John Smith”) –… …receivable / sales) x 365 – An unusual volume of sales to entities whose substance and ownership is not known – An unusual surge in sales by a minority of… …alone may cause concern. Fraud Case Analysis: Lessons Learned 275 Fraud surveys reveal an interesting pattern. Auditors generally perceive… …, www.aicpa.org/audcommctr/spotlight, 2005, pp. 13–19 Beasley, Mark S. / Carcello, Joseph V. / Hermanson, Dana R.: Fraudulent Financial Reporting 1987–1997: An Analysis of U.S… …Consider Fraud in an Audit of Financial Statements, February 2004 Krambia-Kapardis, Maria: Enhancing the Auditor’s Fraud Detection Ability –…

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  Case 2: ZZZZ Best Company (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …teen-age millionaire. But only a few people saw, or wanted to see, that his business scarcely existed. The story of Barry Minkow is an insightful account… …of how an amoral individual still in his teens was able to sell what one journalist called a “hologram” of a corporation to Wall Street. Barry… …on the back of the Internet boom. Within weeks, ZZZZ Best shares soared from an initial offering of USD 4 to USD 18. Barry Minkow retained a 53%… …controlling interest in ZZZZ Best, and this made him an instant multi-millionaire on paper. By March 1987, Minkow’s shares were worth USD 64 million, and a… …to take a company public in American financial history. During an appear- ance on the Oprah Winfrey Show in April 1987, Minkow encouraged his peers to… …, Minkow dis- missed the auditor and engaged Ernst & Whinney, an international public account- ing firm (now part of Ernst & Young) to perform the following… …. And he fooled the auditors with an act that seemed like Hollywood: he rented half-finished buildings, fixed them up to look like ZZZZ Best work sites… …New York. Eventually, an independent law firm asked for the addresses to all of the company’s restoration jobs. Minkow realized that he could not… …reported USD 100 million. In July 1987, just three months after the company’s stock had reached a market value of nearly USD 220 million, an auction of its… …lawyer portrayed him as an immature teen-ager, who hoped to im- press girls and got involved with the wrong people. For his part, Minkow contended he was…

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  Case 3: Crazy Eddie (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …area of New York, New Jersey and Connecticut. In the early 1980’s, the company made its big breakthrough, when consumers showed an almost insatiable… …electronics industry had already come to an end, and the industry had become saturated with retailers. Antar could not sustain the pattern of double-digit… …inventory in the stores was only half what was listed on the books. Despite desper- ate rescue attempts, the ship was sinking fast now. There was an immense… …that had been smuggled to Israel and deposited in an Israeli bank was brought back into the U.S. via a bank in Panama, and pumped back into the… …risky. – The accounting firm had allegedly “lowballed” to obtain Crazy Eddie as an audit client, realizing that it could make up for any lost audit… …altered documents. (Crazy Eddie used an outdated manual inventory system. The absence of a computer-based system made it much more difficult for the… …an Israeli citizen. In 1993, he was extradited to the United States, and was finally sentenced to 82 months in prison and ordered to repay USD 121… …, adding that if his crimes were smaller than Eddie’s, they were still plenty bad. “Crazy Eddie was an empire built on deceit. The company was rotten to its…

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  Case 4: MiniScribe (1989)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …started to smell trouble, the new management initiated an in-house investigation into the reliability of MiniScribe’s financial reports for 1986…
• eBook-Kapitel aus dem Buch Accounting Fraud

  Case 5: Phar-Mor (1992)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …, but it was disbursed on a Phar-Mor bank account. The travel agent thought it odd that Phar-Mor would be paying these expenses. Since she was an… …activities and helped to expose an intricate accounting fraud. The fraud was carefully carried out over several years by persons at different organ-… …inventory system did not include a perpetual inventory record. The company contracted with an outside firm to physically count and provide the retail price… …submitted a report on their physical count, Phar- Mor accountants would prepare an “inventory compilation packet” for each store and for corporate… …Coopers & Lybrand recklessly overlooked. It should have caused an experienced retail auditor to have suspicions about inventory at Phar-Mor. But Coopers &… …syndrome”. He had an “unquenchable thirst for winning”, no achievement was enough for him, and he ravenously sought new thrills. How- ever, in the summer of… …1992, Monus’s illusion of success came to an abrupt end when his empire collapsed almost overnight. References: Albrecht, W. Steve / Albrecht…

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  Case 6: Bausch & Lomb (1994)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …. In late 1994, following an article in the December 19 edition of Business Week magazine, the SEC began to focus on the booking of sales at Bausch &… …received an anonymous letter from a group of concerned APD employees asserting the fraudulent booking of sales by local management. In response, a Bausch &… …Lomb audit team began an internal investigation. By the autumn of 1994, they uncovered an elaborate scheme at the division’s Hong Kong offices to boost… …recognized revenue in the APD and the CLD. The SEC concluded that the company had made materi- ally false and misleading financial statements that led to an…

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  Case 7: Waste Management (1997)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 55 Case 7: Waste Management (1997) The Waste Management case provides an anatomy of an accounting… …portrays an accounting fraud perpetrated by the highest-ranking officers at WMI. As the scheme unravelled in 1997, the news sent WMI’s stock value tumbling… …material and that Andersen could issue an unqualified audit opinion on the com- pany’s 1993 financial statements. In 1994, WMI continued to engage in the ac-… …client”. It indicated that WMI actively managed re- ported results, had a history of making significant fourth quarter adjustments, and was in an industry… …agement’s netting of the gains and charges and the lack of disclosures. We have communicated strongly to management that this is an area of SEC exposure. We… …company had previously worked as an auditor at Andersen. – During the 1990s, 14 former Andersen employees worked for WMI, most often in key financial… …typed up an agreement that laid out 32 changes in prac- tices that WMI would have to undertake over time to make its finances more truth- ful. The signed… …complaint, WMI and its outside auditor constituted an agreement to cover up past frauds by committing additional frauds in the future. The SEC believed that… …management consistently refused to make these adjustments. Instead, WMI secretly entered into an agree- ment with Andersen to write off the accumulated… …paid by an audit firm in an enforcement action brought by the SEC. Besides, three audit partners were fined individually. Some believe that Andersen…

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