Acct 4280 - Accounting Fraud

ACCOUNTING FRAUD

EARNINGS MANIPULATION

&

CREATIVE ACCOUNTING

SHARON GRIFFIN

ACCT 4280 CONTEMPORARY ISSUES IN ACCOUNTING

SUMMER 2011

PROFESSOR CAROL C BISHOP, CPA

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Sharon Griffin

Professor Carol C Bishop

Acct 4280

June 30, 2011

Accounting Fraud

Accounting fraud is skillful acts of creative accounting and earning manipulation. Creative accounting is not considered illegal, but it is unethical. The description of creative accounting is often referred to as "cooking the books" (Tatum, wisegeek.com). An example of earning manipulation is the disguising of an increase in cash by the use of different types of accruals. Whether it happens in a private company, public company or in healthcare, accounting fraud is illegal and when discovered, it cost millions. Accounting fraud has become more popular with the economic situation of our Country.

A particular accounting trick that gets used by financial executives includes misrepresentation of financials. Misrepresentation of the financial statements includes overemphasis of increased revenue that is due to a large jump in sales. The problem that occurs is the lack of emphasis placed on the increase in the expense account due to the positive sales volume. Even though this way of accounting is not illegal, it does appear to the investors/stockholders that the company is in a better financial position, when in reality, there is little to no growth.

Another accounting tactic is the delay of providing financial information to external auditors when it is requested. The reason for this tactic would be to cause the auditors to rush to finish with the audit in the timeframe that the engagement was planned in the hopes of them missing the tactical "cover-ups". A person committing accounting fraud wants to create a distraction, such as the use of attractive staff to divert the attention of the auditors (Voigtt, Sex, Lies July 2010). Accounting fraud is not about inaccuracy but it is about not being truthful. When fraud is suspected, several questions should be asked because dishonest people get easily offended about having to verify their entries.

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Accounting fraud tends to happen more in private businesses, rather than in public companies because there tends to be less internal controls in private businesses. "Two common red flags that indicate possible earnings management are (1) cash that does not follow earnings and (2) accruals (the difference between earnings and cash) that don't correspond to either earnings or revenues"(Zwirn, 'Camouflaging' Earnings Management, June 2011). Manipulation can be done by recognizing income in present time, but postponing expense recognition. A type of earnings management that is hard to detect, manages cash in a way that tends to show performance improvement.

There is three common factors that exist in fraud; the incentive, opportunity, and rationalization (Zerine, Sex, Lies & Accounting Fraud, July 2010). Many times greed is what causes people to commit these types of criminal acts. Some companies get by with fraudulent activities for years