Financial Statement Fraud : Strategies for Detection and Investigation

by Gerard M. Zack
Copyright © 2013 by Gerard M. Zack.

CHAPTER TWO

Timing Schemes

ALTERATION OF RECORDS

A sales transaction is often supported by several types of records: contracts,

sales orders, sales journals, shipping documents, and many others. Physically
changing information in any of these may be all that is necessary to perpetrate
a revenue recognition fraud scheme. Two examples of record alteration in con-
nection with timing schemes are:

1. Backdating of agreements. This method is as simple as it sounds. Sales

or revenue arrangements that are finalized in one accounting period are
falsely dated as though they were executed in the preceding period. This
technique may or may not require the knowledge of the customer. Back-
dating of shipping documents is a variation on this technique and can be
used to accomplish the same goal.
2. Keeping the accounting records open past the end of the period.
Similar to the backdating of an agreement, this technique allows for sales
of the subsequent period to be recorded as though they occurred in the
preceding period. Years ago, when many businesses maintained their
accounting records manually, this was accomplished simply by entering

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10 ◾ Revenue-Based Schemes

an inaccurate (earlier) date for a transaction in the sales journal. In an

automated environment, keeping accounting records open beyond the end
of a period can be accomplished either by entering an incorrect date, or
overriding a computer‐generated date during the input stage of a transac-
tion or by making changes to the computer program itself.

An example of the latter occurred in the case of Sensormatic Electronics

Corporation in 1994 and 1995. According to the SEC, as described in AAER
1017, on the last day of the quarter, Sensormatic would bring down the com-
puter system that recorded and dated shipments to customers. As a result, the
computer date would continue to reflect the last day of the quarter, resulting
in the false recording of shipments made after the end of the quarter as though
they were shipped before the end of the quarter.
Another example of keeping the books open beyond the end of the quarter
involved Computer Associates International, Inc. (CA). In its complaint, the SEC
charged CA with premature revenue recognition on software contracts from
1998 through 2000. The CA scheme was very simple. The company kept the
books open for several days after the end of each quarter, allowing contracts exe-
cuted by customers or CA after the end of the quarter to be recognized as though
they were executed within the quarter just ended. CA would often conceal this
practice by “using licensing contracts that falsely bore preprinted signature dates
for the last day of the quarter that had just expired, rather than the subsequent
dates on which the contracts actually were executed.” This enabled CA to meet
analysts’ expectations. In the first quarter after ceasing this practice, CA missed
its earnings estimate and its stock price fell by 43 percent in one day.
Finally, the case of Del Global Technologies Corp. involved a complete
second set of sales and accounts receivable records, one supported with fake
invoices or shipping documents, to support the early recognition of revenue
from 1997 through 2000. Del Global is described more fully in the next section,
on shipping schemes.

SHIPPING SCHEMES

The shipping department can be utilized to prematurely recognize revenue. By

doing so, shipping documents become available as support for a sale that should
not really be recognized until the next period.
One such method is to ship goods prior to a sale being fully consummated.
This may occur when a sale is in the latter stages of negotiation and the