Improper Asset Valuation and Financial Reporting Frauds.

The Directors, CEOs and CFOs in many companies use at least one of the following items to window dress the balance sheets. Improper asset valuations take many forms in one of the following classifications:
(a)Inventory Valuation
(b)Accounts Receivable
(c)Business Combinations
(d)Fixed Assets
(e) Investment Properties and Biological assets
(f) Cash

(a) Inventory Frauds:
# Failing to write down obsolete inventory results in overstated assets
# Mismatching of cost of goods sold with revenues.
# Manipulation of the physical inventory count, inflating the unit costs used to value inventory. Companies have even made up pallets of inventory with hollow centers,
placed bricks/sand in sealed boxes instead of high value products.
# Companies have even programmed special computer reports of inventory for auditors that incorrectly added up the line item values so as to inflate the overall inventory balance.
# “Bill and hold” items that have already been recorded as sales might be included in the physical inventory count, as might goods owned by third parties but held by the company on consignment or for storage.
# Large value of inventory in transit is created, in a place where it is hard for auditors to observe it.
# Shuttle inventory between locations being observed by auditors on different days, so as to double count the inventory.

(b) Accounts Receivable Frauds:
# Overstatement of sales creating fictitious receivables.
# Failure to write off or establish adequate provision for accounts receivable as bad debts.
# Companies have even programmed special computer reports of trade receivables for auditors that incorrectly aged the debts to cover up long over-dues.

(c) Business Combinations manipulation:
# Overstatement of goodwill by creating excessive reserves for various expenses at the time of acquisition, intending to quietly release those excess reserves into earnings at a future date.
# Not impairing goodwill for acquisitions that are not making adequate profits.

(d) Fixed assets manipulation:
# Incorrect capitalization of expenses
# Assets are leased, not owned, and the fact is not disclosed during the audit of fixed assets.
# Over stating fixed assets at market values and using lower depreciation rates or residual values that cannot be justified.

(e) Investment Properties and Biological assets
# Use of valuers who think that values can be plucked from thin air to place on properties, with no relevance to the market or the type of asset.
# Using wrong models to value unique assets and biological assets. No consideration made to the type of asset or the biological transformation of plants.

(f) Cash
Until the fraud at Satyam in India, no one thought that a fraud of that magnitude can be perpetrated in manipulating bank and deposit balances. Wrong amounts in the bank reconciliation, tampered bank statements, non existent deposits, undisclosed bank accounts can be used for frauds.

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About surenraj

“Views expressed are my own”
This entry was posted in Governance and tagged . Bookmark the permalink.

2 Responses to Improper Asset Valuation and Financial Reporting Frauds.

  1. shiranee says:

    thanks for shedding light in expanding the horizons of auditing;this facilitate transparency and reliable financial reporting.

  2. surenraj says:

    It does not expand the horizons of auditing, but should help in being skeptical about the audit approach, within the ambit of the auditing standards.

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