Book Forensic And Investigative Accounting—Please Answer The

Book Forensic And Investigative Accountingplease Answer The Questions

Book Forensic And Investigative Accountingplease Answer The Questions

Book: Forensic and Investigative Accounting Please answer the questions listed below and submit in a word document. Exercise 41. What are Howard M. Schilit’s seven financial shenanigans? Exercise 71.

Go to the FBI internet site or search other sources and prepare a report as to the fraudulent activities in these companies. How did the people pull off the fraud? a. Quest Communication. b. AmeriFunding.

Paper For Above instruction

Forensic and investigative accounting are crucial fields within the broader scope of accounting that focus on detecting, investigating, and preventing fraud and financial misconduct. This paper addresses three key areas within this domain: Howard M. Schilit’s seven financial shenanigans, an analysis of fraudulent activities in Quest Communications and AmeriFunding, and the mechanisms through which these frauds were executed.

Howard M. Schilit’s Seven Financial Shenanigans

Howard M. Schilit, a prominent forensic accountant, identified seven common types of financial manipulation or "shenanigans" that companies often use to inflate their financial health or mislead investors. These shenanigans serve as red flags for auditors, investigators, and analysts in detecting potential fraud. They include:

1. Asset Overstatement: Inflating the value of assets such as inventory or receivables to enhance balance sheets.
2. Timing Differences: Recognizing revenues or expenses in periods that do not reflect the actual economic activity, such as premature or delayed revenue recognition.
3. Shifting Current Expenses to Capitalize: Converting operating expenses into capital expenditures to defer expenses and boost current earnings.
4. Intentional Cutoff Errors: Manipulating cutoff dates at the end of reporting periods to inflate revenues or decrease expenses.
5. Misclassifying Cash Flows: Misrepresenting cash flow statements to hide cash shortages or inflows, misleading stakeholders.
6. Exploiting R&D and Other Intangible Assets: Overstating the value of intangible assets or capitalizing research and development costs improperly.
7. Recording False or Non-Existent Revenues: Recognizing revenue that was not actually earned, often through fictitious sales or round-tripping transactions.

Recognizing these red flags helps forensic accountants scrutinize the financial statements more effectively, ensuring transparency and accuracy in financial reporting.

Fraudulent Activities in Quest Communications and AmeriFunding

Quest Communications

Quest Communications, a telecommunications company, was embroiled in a significant accounting fraud scandal that involved manipulating revenue figures to meet Wall Street expectations. According to the FBI and SEC investigations, the fraud was primarily executed through "channel stuffing" and improper revenue recognition practices. Channel stuffing involves artificially inflating sales by pushing more products into the distribution channels than can be sold to customers, often accompanied by providing incentives or discounts to retailers. Quest's management used aggressive accounting techniques to record revenues prematurely, including recognizing revenue upon shipment rather than upon actual delivery or customer acceptance. These tactics inflated the company's revenue figures temporarily, creating an illusion of strong financial performance. The fraud was uncovered when auditors noticed discrepancies between shipment records and recognized revenues, prompting further inquiries into the company's sales practices.

AmeriFunding

AmeriFunding was involved in a fraudulent scheme centered around misrepresentation of loan and investment figures to attract investors. The company engaged in securities fraud by falsifying financial statements, inflating the value of assets, and misrepresenting the outcomes of its financial operations. The perpetrators used shell companies and fake loan documents to create an illusion of profitability and growth, enticing new investments. The scheme relied on deceptive accounting practices such as recognizing income prematurely, falsifying loan balances, and hiding liabilities. These manipulations enabled the company to appear more financially sound than it genuinely was, defrauding investors out of millions of dollars. The fraud was eventually uncovered through forensic examination of bank records, inconsistencies in reported income, and whistleblower reports.

Mechanisms of Fraud Commited in These Cases

In both cases, fraudsters employed sophisticated and often covert techniques to pull off their schemes. In Quest Communications, the primary mechanism involved revenue recognition fraud, where revenues were recorded before the actual sale was completed. This was achieved through manipulating shipment records and recognizing revenue at shipment rather than upon receipt by customers. Such practices deceived financial statement users by overestimating sales and earnings.

Conversely, in AmeriFunding, the fraud relied heavily on fraudulent financial statements, fake documents, and misrepresented asset values. The perpetrators created false documentation and used complex corporate structures to hide the true financial position. Both cases highlight the importance of rigorous internal controls, independent audits, and forensic examination to detect and prevent such frauds.

Understanding these methods underscores the necessity for auditors and forensic accountants to scrutinize not only financial statements but also underlying transaction records, contracts, and supporting documentation. This comprehensive approach helps uncover deceitful practices that might otherwise go unnoticed and provides transparency and accountability in financial reporting.

Conclusion

Detecting and preventing financial fraud requires a keen eye for red flags and an understanding of common manipulative tactics, such as those identified by Howard M. Schilit. The cases of Quest Communications and AmeriFunding exemplify the sophisticated methods fraud perpetrators employ to deceive stakeholders. These include premature revenue recognition, fake documentation, and asset overstatement. Effective forensic accounting, internal controls, and adherence to ethical standards are vital in combating such fraudulent activities, ensuring the integrity of financial reporting and protecting investor interests.

References

• Schilit, H. M. (2013). Financial Shenanigans: How to Detect Accounting Gimmicks & Uncover Conductive Fraud. McGraw-Hill Education.
• United States Securities and Exchange Commission (SEC). (2004). SEC Charges Quest Communications with Accounting Violations. SEC.gov.
• Federal Bureau of Investigation (FBI). (2004). Investigative Reports on Corporate Fraud Cases. FBI.gov.
• Gepp, A., & Kallunki, J. (2014). Fraud Detection Techniques in Financial Statements. Journal of Forensic & Investigative Accounting, 6(1), 123-139.
• Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2014). Fraud Examination. Cengage Learning.
• U. S. Department of Justice. (2004). Investigation of the AmeriFunding Scam. DOJ.gov.
• Rezaee, Z. (2005). Forensic accounting and fraud examination. Journal of Criminal Justice, 33(2), 129-145.
• Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting. John Wiley & Sons.
• Stapa, N., & Jusoh, S. (2010). Detecting financial statement fraud: Techniques and issues. Asian Journal of Business and Management Sciences, 1(4), 45-59.
• Ramsay, A., & Svanström, R. (2014). Corporate Fraud: Techniques and Prevention. Journal of Business Ethics, 117, 543-559.