a. Identify and describe Earnings Management Shenanigans 1 through 7. b. Relate

Question

a. Identify and describe Earnings Management Shenanigans 1 through 7.
b. Relate as many of them as possible to the fraud facts presented in the    

                following case.

c. How would you utilize the Bull’s Eye Approach with respect to this case?

“Fraud investigators found that 70% of the nearly $160 million in sales booked by an Asian subsidiary of a European company between September 1999 and June 2000 were fictitious. In an effort to earn rich bonuses tied to sales targets, the Asian subsidiary’s managers used sophisticated schemes to fool auditors, including funneling bank loans through third parties to make it look as though customers had paid, when in fact they hadn’t.

In a lawsuit filed by the company’s auditors, it was alleged that former executives ‘deliberately’ provided ‘false or incomplete information’ to the auditors and conspired to obstruct the firm’s audits. To fool the auditors, the subsidiary used two schemes. The first involved factoring unpaid receivables to banks to obtain cash up front. Side letters that were concealed from the auditors gave the banks the right to take the money back if they couldn’t collect from the company’s customers. Hence, the factoring agreements amounted to little more than loans.

The second, more creative, scheme was used after the auditors questioned why the company wasn’t collecting more of its overdue bills from customers. The subsidiary told many customers to transfer their contracts to third parties. The third parties then took out bank loans, for which the company provided collateral, and the ‘paid’ the overdue bills to the company using the borrowed money. The company was, in effect, paying itself. When the contracts were later canceled, the company paid ‘penalties’ to the customers and the third parties to compensate them ‘for the inconvenience of dealing with the auditors.’

The investigators also found that the bulk of the company’s sales came from contacts signed at the end of quarters, so managers could meet ambitious quarterly sales targets and receive multimillion-dollar bonuses. For example, 90% of the revenue recorded by the subsidiary in the second quarter of 2000 was booked in several deals signed in the final nine days of the quarter. But the company was forced to subsequently cancel 70% of those contracts because the customers—most of them tiny start-ups—didn’t have the means to pay.”

Explanation / Answer

a. Eraning management shinanigans is action taken by managemet that mislead investors by providing incorrect financila information about the earnings and financial position. The possible Eraning mangements shinanigans are the following

1)Recording Revenue too sson

2)Recording bogus revenue

3)Boosting income using unsustained activity

4)Shifting current expense

5)Shifting current income

6)Other techniques of hide expenses

7)Shifting future expenses

b) In the given scenario company uses the following techniques

1)Recording Revenue too soon: Booking revenue at the year end without satisfying revenue recognition criteria to get the bonus. Subsequently it get cancelled

2)Recording bogus revenue: Year end contracts are noty sustainable. The intention is to booking bogus revenue and mislead investors

3)Boosting income using unsustained activity : The 70 % cancellation of year end contracts shows that company is booking revenue using unsustained activity

4)Shifting current expense : The uncollectable receivables are actually baddebts for the period. Company making fake factoring arrangements to mislead auditors and shifting the expense

c) Bull's eye approach is to make every effert util to collect sufficient evidence to prove the suspected threat.

   1. Collect independend confirmation from all debtors

   2. Since company is a contractor visit the site to see the work development. It will helps to identify actual work is going on or not

   3. Collect details of all subsequently cancelled contract and make further enqury on it

   4. Collect complete set off documents with bank for factoring arrangements

   5. Also get the details of third party payment and agreement with them

    6. Vouch all payments properly and find the supportiong evidence it will helps to trace penalty paid for third     parties in assisting fraud

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.