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Using A Variety Of Measures To Detect

2191 words - 9 pages

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Using a Variety of Measures to Detect FraudAnalytic, Nonfinancial, and Red Flags |
For
Dr. Pacini
ACG 6686:
Accounting Fraud Examination Concepts
-Spring 2013 –

Mavis Curley
Florida Atlantic University

April 25, 2013

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I. INTRODUCTION

The use of analytical procedures on financial data to asses risk and detect fraud is standard practice for auditors; however, using only financial data has been shown to be ineffective in uncovering many frauds. (3-Brazel) Auditors and forensic accountants find that when nonfinancial performance measures and financial data are compared inconsistencies can be exposed, and fraud risk revealed, that otherwise would have gone ...view middle of the document...

Given only this information an auditor would have little cause for alarm and asses risk of fraud to be low. Why then would The Public Company Accounting Oversight Board (PCAOB) encourage the use of Non-Financial Performance Measures and concluded that “analytical procedures using only financial statement data are likely to be ineffective in detecting fraud” (PCAOB 2004, 16) The use of non-financial measures can reveal possible risk and financial statement fraud even though Corporation X appears vital there are non-financial performance measure available to look further into the claims made by management in the financial statements.
Financial Statement Information: Corporation X
  | 2009 | % 0f Sales | 2010 | % 0f Sales | Change from Prior Year | 2011 | % 0f Sales | Change from Prior Year |
Revenue | $400,000 | 100% | $450,000 | 100% | 12.50% | $500,000 | 100% | 11.10% |
Cost of Goods Sold | 80,000 | 20% | 90,000 | 20% | 12.50% | 100,000 | 20% | 11.10% |
Gross Margin | 320,000 | 80% | 360,000 | 80% | 12.50% | 400,000 | 80% | 11.10% |
Operating Expenses | 280,000 | 70% | 315,000 | 70% | 10.70% | 350,000 | 70% | 12.90% |
Net Income | $40,000 | 10% | $45,000 | 10% | 12.50% | $50,000 | 10% | 11.10% |
| | | | | | | | |
Figure 1: (AAA)
Employee head counts are a commonly available non-financial performance measure (NFM). Changing the number of employees to affect expenses fraudulently is difficult. Industries will have a similar rate at which the head counts increase along with revenue, look to the IRS, state, local municipalities, and 10k filings to provide records supporting employee numbers and industry norms. “Comparing historical changes in employee numbers with current changes will help in assessing if revenue is being reported accurately”. (AAA) If physical assets and employees are complements, then a decrease in employees relative to total assets could signal overstated asset balances.(Dechow) Researching and including information regarding employee numbers provides reliable non-financial audit evidence.

Independently acquired customer satisfaction survey results are readily available for virtually every industry. While survey results don’t provide much insight by themselves they can be used in conjunction with another NFM to compare if revenue claims are valid. Figure 2 (below) compares Corporation X’s revenue with two sources of publicly available non-financial data, the employee head count and the JD Power Customer Satisfaction Rating. Note that Corporation X had steady positive revenue growth year over year for the 2009-2011 periods; the period 2009-2010 employee numbers increased nearly as much as revenue while revenue grew about the same in the next period the corporation reports an 18% drop in the number of employees. Concurrently Corporation X had a steady satisfaction rating 2009-2010 but suffered a 13% decrease in its customer satisfaction rating in 2011. The figures beg the question:...

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