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ACC 556 – Forensic Accounting

Week Four Team C Reflections
Week five material focused on the impact accounting principles have on detecting fraud as well as the financial statement fraud schemes that have been committed in recent years.
Helen found course materials and discussion on financial statement fraud gave me a pause. I was aware of the fact that it is possible to manipulate financial results and make operations appear successful to lenders and investors, while quite the opposite may just as well be true, but I did not realize how wide spread is the problem (746 cases being investigated by FBI as we speak which means there are a lot more out there yet to be uncovered or will never be uncovered or prosecuted). Stories of companies overstating revenues by millions and billions of dollars seem to be common nowadays. I would think that if not for SEC oversight, even more companies would commit financial statement fraud. If I were an investor or a lender I would certainly want to study financials and accompanying notes and disclosures to financial statements of the company I am considering to invest in, I would compare their ratios between fiscal years (especially changes in days in accounts payable and receivables, changes in inventory versus sales, changes in reserves for doubtful accounts and obsolete inventory), I would also compare their performance with other companies in their field. Any sudden growth or performance that meets analyst’s forecasts is now would be a red flag that warrants further investigation. Jeff found the discussions involving the effectiveness of accounting principles most interesting. Previously, I hadn't given much thought to GAAP's ability to deter fraud because I was so focused on learning what it is. Coming from the perspective of GAAP as a guide and list of rules, it also made me realize the potential it has to deter fraud simply by it's existence. Like traffic laws, accountants are generally more likely to follow GAAP because it is there, and by it's nature it defines proper and improper behavior. I was also intrigued by the text material on financial statement fraud. So many of the high profile cases we've read about involve fraudulent financial statements and executives trying to prop up struggling companies. I've also noticed that many of the documented fraud cases tend to be discovered after about 2-5 years, so I wonder if the significantly longer jail time faced by those who get caught is worth it. Melissa found this week's material to be more easily understandable due to the build-up of similar fraud scheme descriptions from the previous weeks. It is, on the other hand, difficult for me to pin-point the actual fraudulent activities going on when reading through the Apollo case. Some of the items jump right off the page at me, but others are not as obvious and I get confused as to what I'm actually looking for. Perhaps I do not have the investigative eye needed to be a forensic accountant? I enjoyed the reading this week though. I felt it was straight-forward and easy to understand. After reading the material, I had an easier time going back to the Apollo case and pulling out information to use in my memo. Each week gets a little better!
Antoinette found interesting this week was a discussion question that said, Do you think that accounting principles deter fraud or are a to-do list of fraud? This was a great question because it makes one think about the overall purpose of accounting principles and if they aid or abed fraud. Many of us would like to believe that accounting principles deter fraud but in actuality they are a to-do list of fraud well I would say a not-do list. A not-to do because it shows fraudsters what the accountant will be looking for, but it is a to-do list for accountants to know what to look for. While accounting principles are laid out in detail, not everyone is financially inclined to understand what those details actually mean. Think about all of the fraud that has been committed with some of the major corporations, like Enron or Overstock.com. These companies while they did they best to hide errors or intentional fraudulent activity, they still slipped up. Regardless of the complexity of the scheme, there were mistakes on the companies part that helped lead analyst, auditors, and accountants to the fraudulent activity. The accounting principles set forth to hopefully deter people from committing fraud but every fraudster believes that every system has a loophole. They use the accounting principles and loopholes in finding out what not to do and what to do to commit fraud, however analyst, accountants, and auditors also use those loopholes and accounting principles as a to-do list of what to look for. The discussion question really intrigued me because both sides can be argued equally, however this question, helped me to not only put this class into my full circle of accounting experience but it makes me review accounting principles as a whole in a new light.

References

Louwers, T. J., Ramsay, R. J., Sinason, D. H., &Strawser, J. R. (2011).Auditing & assurance services. (4th ed.). New York: McGraw-Hill.
Silverstone, H. &Sheets, M., 2007, Forensic Accounting and Fraud Investigation for Non-Experts, Second Edition, Wiley
Wells, J. (2011). Principles of fraud examination (3rd ed). Hoboken, NJ: Wiley.