... and Nothing but the Truth: Uncovering Fraudulent Disclosures
2001; American Institute of Certified Public Accountants; Volume: 192; Issue: 1 Linguagem: Inglês
ISSN
0021-8448
Autores Tópico(s)Risk Management in Financial Firms
ResumoGo beyond the numbers to find the whole story. In a perfect world, the numbers in financial statements would tell CPAs everything they need to know about a business. Numbers are precise, definable and measurable. But in reality CPAs need words, too, to tell them the whole story of an enterprise. That's the sole purpose of the footnotes to financial statements. Since fraudulent disclosures fall into a number of recognizable patterns, knowing how these schemes work can greatly help the financial statement auditor detect them. Generally accepted accounting principles concerning disclosures require that financial statements (1) include all relevant and material information in the financials or footnotes and (2) not be misleading. These requirements present special challenges to the auditor, beginning with the most obvious: How can you be assured management has told you everything you need to know? Most fraudulent disclosures involve purposeful omissions, which normally fall into one of five categories: liabilities, significant events, management fraud, accounting changes and related party transactions. Liability omissions usually involve management's intentional failure to disclose loan covenants or contingent liabilities. Auditors can uncover loan covenants by carefully reviewing financial institution documentation, and, by examining sales contracts, warranties, and other legal documents, they can find contingent liabilities. Although upper management may never tell you that they are involved in a potentially damaging lawsuit, corporate counsel will. Ask them. You also can independently check public records at the federal or state level. If a lawsuit has been filed, you can find it. Significant events might include the onset of product or manufacturing obsolescence, the appearance of new competitive products or technology, possible lawsuits that could materially affect the company's bottom line or major anticipated purchases or borrowings--anything, in short, that could affect future financial statements. Since an auditor runs the risk that senior management will not disclose these matters voluntarily, you should interview those company employees who would know: engineers, key sales staff, warehouse personnel and the finance department. Document your interviews in the workpapers. Management fraud, even if it involves immaterial amounts, is always significant. Such fraud is usually detected through tips and complaints. The auditor should consider interviewing senior support staff and recently departed employees, asking in a nonaccusatory tone the question: Do you suspect anyone in management who might be secretly stealing from the company? Document the names and responses of the people you talk to. Accounting changes must be disclosed if they have a material impact on the financial statements. Luckily, these changes should be easy to spot. Look at the previous financials and check to ensure the company still uses the same depreciation method, revenue recognition criteria, and accrual calculations. Related party transactions typically involve an executive who holds an undisclosed financial interest in another entity. For example, in one instance, the chairman of a state retirement system saw to it that $65 million in pension funds was invested in a savings and loan company he partially owned. Shortly thereafter, regulators seized the SL you may have uncovered a related party transaction. UNCOVERING DISCLOSURE FRAUD The auditor also can consider other approaches. …
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