1. Inventory-Related Financial Statement Frauds Chapter 12B

2. Outline Learning objectives Companies that have been involved in inventory- related financial statement fraud schemes Inventory recording in the financial statements Reasons for committing inventory fraud Different types of inventory-related fraud schemes Symptoms for detecting inventory-related fraud Conclusion Game! 3. Learning Objectives Discuss inventory-related financial statement fraud schemes Identify ways of searching for inventory- related financial statement fraud symptoms Explain the importance of, and ways to follow up on, inventory-related fraud symptoms 4. Financial Statement Inventory Frauds 5. Types of Inventory Merchandise Inventory Manufacturing Inventory Raw Materials Work In Process Finished Goods 6. Where Inventory Belongs in the Financial Statements Income Statement Cost of Goods Sold Opening Inventory + Purchases of Inventory - Closing Inventory =Cost of Goods Sold Balance Sheet Closing Inventory 7. Rule of Inventory Recording =Lower of Cost and Net Realisable Value 8. Effects of Inventory Overstatement on the Income Statement 9. Cost of Goods Sold Calculation 10. Reasons for Over-Stating Inventory To overstate income. To achieve goals. To increase the companys value. To meet bank covenants. To hide poor operational performance. For management compensation. To affect future acquisitions or sale of the business. To hide the theft of inventory. 11. Identifying Inventory- Related Fraud Exposures Double counting Capitalizing costs that should be expensed Cut-off problems Overestimating problems Bill-and-hold sales Consigned Inventory 12. Inventory-Related Fraud Symptoms Analytical Accounting or Documentary Control Behavioural or Verbal Lifestyle Tips and Complaints 13. Searching for Inventory and Cost of Goods Sold Symptoms 1. Wait until you discover them by chance 2. Proactively search for them 14. Searching for Inventory and Cost of Goods Sold Fraud 15. Analytical Symptoms Changes in record balances from period to period Changes in relationships from period to period Comparing information with other companies Comparing amounts with the assets they represent 16. Accounting or Documentary Symptoms Software ACL IDEA The five Ws Who What When Where Why 17. Control Symptoms Look for weak controls over Purchasing process Receiving Recording of liabilities Cash disbursements Storage Processing Shipping Transferring the cost of inventory sold Accurately tracking inventory costs Physically observing inventory OCCURANCE - ACCURACY COMPLETENESS TIME PERIOD 18. Behavioural or Verbal Symptoms Lifestyle symptoms (Not very effective) Behavioural or verbal symptoms using: Interviewing/enquiry Look for inconsistencies between observations and results from inquiry of management 19. Tips and Complaints The Nature of inventory-related fraud schemes means that often, many people must be involved Physical goods Brought in handled shipped Talking with those personal who are in charge of handling the inventory, vendors and customers Use inquiry methods to ask the right questions Often people suspect something but are afraid to speak out #1 fraud detection method is investigation following a tip or complaint 20. If you were going to commit inventory related financial statement fraud, what method would you use? 21. Video-Crazy Eddie http://www.youtube.com/watch?v=Y_7ntzgTvhs 22. References Tasker, S. J., (2013). Sims shares slashed after $60m British inventory fraud. The Australian National Daily Newspaper. Retrieved from: http://global.factiva.com.ezproxy.waikato.ac.nz/ha/default.aspx Maher, M. W., Lansen, W. N., & Anderson, S. W., (2007). Pepsi and Old Bottles. Fundamentals of Cost Accouting 3rd Edition. Retrieved from : http://www.chegg.com/homework-help/pepsi-old-bottleswhen-fraud-pepsico- occurred-company-somewha-chapter-12-problem-36-solution-9780073527116-exc Vona, L. W. (2011). Inventory Fraud The Fraud Audit (pp. 237-249): John Wiley & Sons, Inc.