Running head: FINANCIAL STATEMENT FRAUD SCHEMES

Financial Statement Fraud Schemes

John Pfaff, V
ACC556
October 26, 2015
Jeffery Dickerson

FINANCIAL STATEMENT FRAUD SCHEMES

Financial Statement Fraud Schemes

The investigation of Apollo Shoes has indicated several areas that hint
to potential areas of fraud. Left unidentified, these fraud schemes could
potentially lead to the entire collapse of the company. Should this occur, any
stakeholder will be negatively impacted, possibly drastically so. As such,
here is overview of an investigation process that contains several
recommendations to uncover any fraud.
WhileexaminingtheaccountsreceivablesectionofApolloShoes,afewinconsistencies
arose.Morespecifically,customersconfirmedthatthebalanceslistedwereconsistentwiththeir
recordsofpurchasesmadethroughouttheyear.However,somecustomersmentionedthatthe
accountswerealreadypaid,orthebalanceswerecreditedduetoproductreturns.Inone
instance,thecustomermentionedthatseveralshoesweresenttothemaftertheyenteredintoan
involuntarybankruptcythatApolloShoeswasinformedof.Thisinformationsuggeststhe
potentialofrevenuemisstatementbyApolloShoes.Whiletheredoesnotappearanappreciable
increaseincashflow,theopportunityforfraudispresentintheaccountsreceivable.
Fraudwithinanorganizationisdetectableusingothertechniquesaswell.Mostofthe
time,investigatorsobtaincopiesofrecentandpreviousfinancialstatementstocomparetosearch
foranydiscrepancies.Thepresenceofinaccuraciesoralterationscouldcauseaninvestigationof
thecase.Investigatorscanalsodeterminerevenueaccountsoftheorganizationbycheckingthe
veracityandintentofthefinancialinputsthatwereincluded.Additionally,therevenuereports
willprovideadeterminationofwhetherthereisanyvariationintheaccountbalancesofthe

FINANCIAL STATEMENT FRAUD SCHEMES

company.Thesereportswillalsohelpcompaniesdetermineiftheyhavefraudulentsales
statements.
Thereareseveralcommonformsoffraudwhichincludesfixedassets,concealment,
improperencoding,andmisuse.Inaccuratereportingoffixedassetscanhaveadirectimpacton
thevalueoftheorganization.Assuch,theorganizationhastheresponsibilitytorecordand
disposeanyassetsthatareunauthorizedorbeyondtheirusablelife.Throughcompliancewith
theseprinciples,investigatorscanbeassuredthatnofraudsarepresentintheorganization.
Additionally,investigatorscanverifytheschedulesfromthestarttotheendoftheyear
toensureproperrecordingoffixedassets.Thiswillallowforanevaluationontheconsistencyof
thelistedbalances,whichallowsthemtodetermineifthereareanywriteoffsontheassets.An
investigationintowhetherthecompanyshouldaligntheircapitalizationpolicyisalsoimportant.
Specifically,basedontheiractions,ApolloShoesweredirectlyaffectedbythedamagesofa
recenthurricane,whichrequiredthemtospendmoneyonrenovation.Thisfundingwasthen
fundedbythecapitalizationpolicy.However,thesamechargescouldhaveeasilybeenappliedto
theroutinemaintenancefunds.Furthermore,thepurchaseofseveralnewcomputersmandates
investigationaswell.Thisprocesshasadirectinfluenceonthefinancialresultsofthecompany,
especiallyiftheyshouldhavebeenexpensed.TherisksofApollowouldinfluencethecostof
thatasset,butonalongtermbasis.
Assetsarefurthermonitoredthroughannualreportsthatlookintothedepreciation
schedule.ThisallowsinvestigatorstoexamineongoingdepreciationanditsrelevancetoGAAP.
Additionally,investigatorsmusthandleanevaluationofassetsfromtheorganizationplusthe
capitalpolicy.Anydepreciationwillbedetectedandwillhaveadirectimpactonthecompanys

FINANCIAL STATEMENT FRAUD SCHEMES

profits.Investigatorsneedtobeawareofhowtheassetsareaffectingthebookandhowthatis
consistentwiththedepreciationschedule.
Shortcomingsthroughouttheinventoryprocessresultfrominaccuraciesfromlisting
noncashitems.Thiskindoffraudcanhaveaconsiderableimpactonthefinancialstandingof
thecompany.AccordingtoGAAP,inventoryvaluesmustbereportedatalowercostormarket
value,whichshouldbethereplacementcost.ThecompanyhasthechoicetouseFIFOorLIFO
orWeightedAverage,butanychangemustbedisclosed,alongwiththereasonsbehindthe
change.Ifinventoryrecordsdonotmatchinventoryonhand,thenthecompanysearningswill
beaffected.Assuch,thecompanyshouldproduceamanualbackupcountofinventoryto
ensurethatthecountsystemmatchesthephysicalcount.Theemployeesresponsibleforthe
physicalcountneedtobedifferentfromtheemployeesresponsibleforthegeneralledger.
Therearevariousmomentsinwhichthecompanydecidestowriteoffproductsthatare
notsellingorarealreadyclassifiedasoutdatedstock.InthecaseofApolloshoes,theitemsthat
stoodoutwerelongstockedinthewarehouse.Althoughthereold,theystillneedtobe
investigatedtoensuretheywerenotsimplywrittenoff.Itisalsoimportantforanorganization
toestablishaverificationcodeforalltheshippingprocessinordertoensurethatalltheitems
circulatedareverifiedbythecompany.Inthesamemanner,salesordersshouldberelatedtothe
salesrecordsaswellasthepurchaserecords.Basedontheinvestigation,nearlyallpurchasesof
thecompaniesneedtoberecorded.
Inconclusion,fraudschemeswilldefinitelycompromisetheimageofacompanywhen
neglected.Therefore,itiscriticalforthecompanytohaveaccesstoacontrolsystemwhen
dealingwithfinancialreporting.Inadditiontotheimagebeingruined,fraudulentactivitywill

FINANCIAL STATEMENT FRAUD SCHEMES

haveadirecteffectontheprofitabilityofthecompany.Nocompanywantsanegativestigma
thatcomeswithhavingimproperfinancialstatementsorhavingrampantfraud.Bybeingaware
oftheitemsmentionedabove,ApolloShoescanpotentiallyrootoutfraudandcorrectitbeforeit
becomesunmanageable.

FINANCIAL STATEMENT FRAUD SCHEMES

References
Bragg, S. M., Epstein, B. J., & Nach, R. (2009). Wiley GAAP 2010. Hoboken, NJ:
Wiley.
Wells., J. T. (2011). Principles of Fraud Examination (3rd ed.). Hoboken, NJ:
Wiley.