Economic Crime Journal

Economic Crime Journal

Dr. David Murphy is a Certified Fraud Specialist and Certified Public Accountant and is a member of the Board of Regents of the Association of Certified Fraud Specialists. In addition, he has served as the Senior Anti-corruption Advisor to the Controller General of Peru and the government of Bulgaria. He was also the director of a two-year USAID anti-corruption graduate education project in Bolivia and consulted to the Central Bank of the Philippines in the wake of a major bank fraud in Manila.

Other Posts:

How to Catch Fraudulent Financial Reporting (11/16/2009)
ASIS Economic Crime Council Highlights LC's Program (11/06/2009)
Fraud on Steroids (10/19/2009)
U.S. Banking Fraud Interview (04/27/2009)
Internet Fraud on the Rise (04/06/2009)
Fraud Close to Home (03/27/2009)
Can Economic Crime Be Eliminated? (03/20/2009)
Madoff and Ponzi (03/26/2009)
New Credit Card Scam (05/01/2008)

In spite of the requirements of the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act and increased enforcement by the SEC fraudulent financial reporting is an ongoing concern.   The Deloitte Forensic Center produced an analysis of the 344 SEC enforcement releases related to financial statement fraud issued from 2000 through 2007.  These 344 SEC releases identified 1,240 different fraud schemes.

The most “popular” methods of fraudulently misstating financial statements were: (1) revenue recognition fraud, (2) Improper disclosures, (3) manipulation of expenses, and (4) manipulation of assets.  The manipulation of liabilities and the manipulation of reserves tied for 5^th place. 

 What to Watch Out For

Revenue recognition fraud is insidious because, by overstating revenue, it makes troubled companies look profitable.  It improves the net income picture on the income statement and usually overstates both assets and retained earnings on the balance sheet.  The following are the most common approaches to revenue recognition fraud, and things to look out for.

Common Revenue Recognition Frauds

 Recording fictitious revenue                           35%

Recognizing inappropriate revenue from swaps, round-trips or barters                  16

Recognizing revenue from sales billed but not shipped                                    12

Recognizing revenue from contingent sales where the contingencies have not been resolved                                                     12

Failure to establish reserves or account for refunds, exchanges or side agreements    13

Recognizing revenue when products or services are not delivered, delivered incomplete, or delivered without customer acceptance                                                         12