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Class Notes

by: Jonathan Notetaker

Class Notes FIN 299X

Jonathan Notetaker
GPA 3.4

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In-Class Notes
Financial Forensics
Professor Boylan
Class Notes
Financial Forensics
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This 2 page Class Notes was uploaded by Jonathan Notetaker on Friday April 1, 2016. The Class Notes belongs to FIN 299X at Ball State University taught by Professor Boylan in Spring 2016. Since its upload, it has received 26 views. For similar materials see Financial Forensics in Finance at Ball State University.


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Date Created: 04/01/16
Class Notes: Financial Transaction 2 1. What is financial reporting fraud?  Anything relating to the income statement or balance sheet 2. Who is victimized by financial reporting fraud?  Investors / shareholders (banks: default risks, fees, interest rates, investigations), competition 3. KPMG’s forensic unit publishes an annual fraud survey. Look at the Integrity Survey 2013 ( integrity-survey-2013.pdf ). What are the four most commonly-cited drivers of misconduct?  Pressure to do “whatever it takes” to meet business goals  The organizations code of conduct not being taken seriously  The fear of job loss over unmet goals  Employees being rewarded for results and not the methods used to achieve them How might these “drivers” motivate fraudulent financial reporting?  The common theme amongst these four primary drivers is fear of unmet company goals. By focusing solely on the results, and not the means utilized to achieve the results, organizations run a very high risk of inadvertently promoting unethical behaviors and practices in order to meet set quotas. 4. Choose one of the following financial reporting frauds. McKesson & Robbins (1938) Allied Crude Vegetable Oil (1963) Equity Funding (1973) Rite Aid (2002) Krispy Kreme (2004) Find what information you can about the fraud (Google is pretty helpful). Briefly summarize the fraud. Which of the fraud schemes that we discussed (pp. 3-6 to 3-16) were used?  In Krispy Kreme’s case, chief executive Scott A Livengood doctored his company’s books as a means to fuel continued growth within the company. In hopes of taking advantage of growth minded investors, Krispy Kreme took to the open markets regardless of the fact that they lacked a viable set of internal controls, did not obtain an existent general counsel, and disposed of three CEOs in four years. Brought about by the pressures of Wall Street, the company fudged its financial records in order to meet the accounting and financial reporting obligations set by shareholders. Personal expenses on part of the current CEO were also hidden from the public.  Pressure to do “whatever it takes” to meet business goals  The fear of job loss over unmet goals 5. HHH Corp. is subject to a debt covenant that requires HHH to maintain a current ratio of at least 3.00. Violation of this covenant would force HHH into bankruptcy. HHH’s FY2013 financial statements show that the current ratio is 3.01. a) Which the fraud schemes might HHH have used to fraudulently increase the current ratio?  Money transfers, inventory schemes, multiple books sets b) If you were HHH’s auditor, describe one thing you would do to satisfy yourself that the reported current ratio is legitimate?  Identify consistency between quarters, line items, and spot checks 6. Explain the fraud triangle.  Motivation – Why we are doing it  Rationalization – Why our actions are justifiable  Opportunity – Low internal controls, etc… 7. Differentiate between earnings management and fraudulent financial reporting.  Earnings management – helps maintain investor confidence  Fraudulent financial reporting – lying by saying something that never really took place


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