Wk 5 Discussion (Corruption in a Global Economy) - Post 1

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10-8

(Learning objective 10-12) Compare the characteristics of purchasing schemes to sales

schemes.

10-9

(Learning objectives 10-10 and 10-12) Assume that an employee is responsible for

purchasing an apartment complex on behalf of his company. The employee owns stock in

the management company that operates the apartment complex. The employee, who does

not let his company know about his stock ownership, makes the purchase. Why does this

example represent a conflict of interest?

10-10

(Learning objectives 10-9 and 10-13) What are some of the ways organizations can

determine whether a particular vendor is being favored?

ENDNOTES

1. Lanza, pp. 22–24.

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CHAPTER 11: ACCOUNTING PRINCIPLES AND FRAUD

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

11-1 Define fraud as it relates to financial statements

11-2 Identify the three main groups of people who commit financial statement fraud

11-3 List the three primary reasons people commit financial statement fraud

11-4 Describe the three general methods used to commit financial statement fraud

11-5 Define overstatements

11-6 Define understatements

11-7 Describe the conceptual framework for financial reporting

11-8 List examples of various types of financial statements

FRAUD IN FINANCIAL STATEMENTS

In this chapter, we will examine some underlying principles that permit financial statement

frauds to occur. Additionally, we will summarize the key provisions of the 2002 Sarbanes–

Oxley Act, designed to deter these offenses. Financial statement frauds are caused by a

number of factors occurring at the same time, the most significant of which is the pressure

on upper management to show earnings. Preparing false financial statements is made

easier by the subjective nature of the way books and records are kept. The accounting

profession has long recognized that, to a large extent, accounting is a somewhat arbitrary

process, subject to judgment. The profession also indirectly recognizes that numbers are

subject to manipulation. After all, a debit on a company’s books can be recorded as either an

expense or an asset. A credit can be a liability or equity. Therefore, there can be tremendous

temptation—when a strong earnings showing is needed—to classify expenses as assets, and

liabilities as equity.

In the next chapter we will explore the five major methods by which financial statement

fraud is committed, but before we delve into the mechanics of these schemes it is important

to first consider three general questions that go to the heart of these crimes:

• Who commits financial statement fraud?

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• Why do people commit financial statement fraud?

• How do people commit financial statement fraud?

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