Chapter 11

What is financial statement fraud?

Intentional misstatement of financial statements to mislead stakeholders.

What are some consequences of financial statement fraud?

Investor losses, market distrust, lawsuits, and reputational damage.

List common methods of financial statement fraud.

Improper revenue recognition, asset overstatement, and expense understatement.

What are the three elements of the fraud triangle?

Perceived pressure, perceived opportunity, rationalization.

What are the 9 elements of the 'perfect fraud storm'?

1. A booming economy.... Decay of moral value.. Misplaced incentives .High analysts' expectations .High debt levels .Focus on accounting rules rather than principles. Lack of auditor independence .Greed .. Educator failures

What is the average duration of financial statement fraud?

About two years.

Who was responsible for 72% of fraud cases from 1987-1997?

The CEO.

What was the average fraud amount in the 1987-1997 period?

$25 million.

What method was used in over 60% of fraud cases from 1998-2007?

Improper revenue recognition.

What is a Wells Notice?

A notice from the SEC of impending enforcement action.

What does professional skepticism include?

Questioning mindset, suspension of judgment, search for knowledge, autonomy, self-esteem, interpersonal understanding.

Why are related-party transactions risky?

They can be structured as non-arm's length and used to hide fraud.

Why are relationships with lawyers a concern?

Lawyers often support clients until fraud is obvious.

Why analyze relationships with regulatory bodies?

Late filings, investigations, or tax issues may signal financial trouble.

Why do investor relationships matter in fraud detection?

Investor pressure can motivate management to manipulate financial results.

What are some organizational red flags for fraud?

Complex structure, no internal audit, offshore entities, insider-controlled board.

What is strategic reasoning in fraud detection?

Anticipating how fraud might be committed and hidden.

What is the fraud exposure rectangle?

A tool to evaluate management background, motivations, and decision-making influence.

What are critical signs in financial results that may indicate fraud?

Unrealistic account balances, unusual end-of-period transactions, poor cash flow with high earnings.

How should nonfinancial performance measures be used?

Compare them to financial results to detect inconsistencies.