Accounting Questions In This Module Focus On The Concept ✓ Solved
Accounting Questionin This Module We Focus On The Concept Of Convers
In this module, we focus on the concept of conversion, which is the actual monetizing of the fraudulent activity of the perpetrator. In this discussion, you will outline how you would implement one of the tools used to identify conversion. Your boss has presented you with a fraud case at a manufacturing plant of a major auto supplier. There is circumstantial evidence indicating that the plant manager has been incorrectly booking revenues and costs to inflate the plant’s performance and increase his bonus. You are asked to employ the net worth method to support these claims. You have access to five years of financial statements and supporting activity data like invoices. Describe how you would conduct this investigation, what key information you'd request, and the steps to identify the fraud. Support your approach with at least one external source, properly cited in APA style.
Sample Paper For Above instruction
The investigation of financial statement fraud, particularly involving revenue and cost misappropriation, requires a systematic approach leveraging financial data analysis methods. The net worth method is a forensic accounting tool suited to uncover such manipulation by tracking discrepancies between a company's net worth changes and reported net income, thereby revealing potential concealed or overstated transactions (Albrecht, Albrecht, Albrecht, & Zimbelman, 2018).
To deploy the net worth method in this case, the primary step involves establishing a clear baseline of the company's net worth over the five-year period, drawing from the provided financial statements. This entails calculating the beginning and ending balances of assets and liabilities to derive net worth annually. During this process, it's crucial to adjust the financial data for any non-operational or non-recurring transactions to focus solely on ongoing operations, which are pertinent for identifying fraudulent inflations or deflations (Wells, 2019).
The next phase involves analyzing the changes in net worth for each year and comparing these with the reported net income. Normally, net worth should increase proportionally with net income; discrepancies might suggest manipulation. For instance, a significant increase in net worth not justified by income could point to the misclassification or suppression of expenses or the overstatement of revenues (Ulusoy & Günay, 2021).
Critical information to request includes detailed ledger accounts, journal entries, and transaction evidence that support revenue and expense recognition. In particular, invoices, shipping documents, and internal communications related to sales and cost bookings should be scrutinized. Additionally, access to any adjustments or journal entries made during the period can help identify unauthorized or unusual entries indicative of fraud.
The specific steps to identify the fraud include: first, reconciling the net worth changes with net income to pinpoint periods with irregularities; second, conducting detailed transactional analyses around these periods to detect unusual patterns or entries; third, verifying high-impact transactions with supporting documentation to confirm their legitimacy; and finally, cross-referencing the findings with industry benchmarks or comparable companies to assess abnormal deviations.
In conclusion, employing the net worth method offers a strategic approach to uncovering hidden fraud by scrutinizing inconsistencies between net worth and reported earnings. Coupling this with detailed transactional review enhances the likelihood of detecting fraudulent activities such as fictitious revenues or understated costs, aiding in building a compelling case for further legal or disciplinary action (Albrecht et al., 2018).
References
Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2018). Financial accounting fraud: A practical guide. Routledge.
Ulusoy, K., & Günay, W. (2021). Detecting financial statement fraud: The role of the net worth method. Journal of Forensic & Investigative Accounting, 13(2), 345-370.
Wells, J. T. (2019). Corporate Fraud Handbook: Prevention and Detection. John Wiley & Sons.