“Cooking the Books”
There are four techniques of executing accounting fraud:
- 1.INCREASE INCOME, e.g., premature sales recognition
- 2.DECREASE EXPENSES, e.g., capitalization of interest
- 3.INCREASE ASSETS, e.g., enhance goodwill
- 4.DECREASE LIABILITIES, e.g., off the balance sheet financing
The following mini-case studies cover these techniques.
Earnings Management
Scott Dalton is the CEO of ABCD Inc. and is reviewing the draft financial statements a month before the year-end.
Income Statement for the Year Ended December 31, 2021
$ |
|
Sales revenue |
1,230,000 |
Less: cost of sales |
61,000 |
Gross profit |
369,000 |
Less: overhead expenses and depreciation expense |
345,000 |
Net income |
24,000 |
Balance Sheet as at December 31, 2021
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