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1. * Enron Corp 2. Hewlett-Packard, Co. 3. * Microsoft 4. * Wal-Mart Stores 5. * Northwest Air 6. * Merck & Co. 7. Computer Assoc. 8. Goodyear Tire 9. * Boeing Co 10. Delta Air Lines *In top ten previous year
www.crisisexperts.com June, 2007

Kimia Farma (overstated & understated) PT Lintas Bumi Cakrawala (faktur pajak fiktif) Bank Lippo (Significant differences valuation of assets) PT Ancona (manipulasi LK untuk pengelapan pajak) PT Askrido (investasi fiktif) SATYAM (Indias Enron Case)

Fraud? The use of ones occupation for personal

enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets. (ACFE, 2006) Fraud encompasses irregularities and illegal acts characterized by intentional deception 5 elements of fraud are:
A representation about a material fact, which is false, And made intentionally, knowingly, or recklessly, Which is believed, And acted upon by the victim, To the victims damage.

Financial Fraud Financial Fraud Investigation Understanding underlying financial fraud (knowledge of accounting principles)

Fraud starts small and just gets bigger and bigger, until something becomes noticeably different or unusual

Huge volume of transactions Excessive number of voids, discounts & returns Excessive or unjustified cash transactions Large number of write offs accounts Window dressing Kiting Lapping

An estimate of what accounts are actually collectable. Why is the number an estimate? In some situations management may be tempted to commit outright fraud. Because no cash is collected when sales are made on account, a corrupt management can record fraudulent additional sales by simply creating fictitious customers and recording fictitious sales keeping the books open at the end of the accounting period. In this case the customers and sales are real, but January sales are recorded as December sales so the end of year financial statements include inflated assets and revenue. In the audit of large companies with millions of dollars of receivables and hundreds of thousands of individual accounts, the audit process relies on statistical sampling, which usually provides a reasonable, but not exact, estimate of collectable accounts

Inventory offers a big opportunity for management to air brush their financial statements. If they want gross profits and, hence, operating profits to appear higher, the value of ending inventory simply needs to be overstated. There are many ways this can be done. The ending inventory value can be fudged upward by overstating the amount of inventory on hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged inventory can be included in the ending inventory count. Sometimes for income tax purposes, management may want to show lower gross and operating profits. Ending inventory mis-measurement can be used for this purpose as well. In this situation, management seeks to undercount and undervalue ending inventory

Because GAAP allows so many different methods of depreciation and the useful life of assets is subject to varying estimates, there is plenty of opportunity for management mischief. Management can make a firm appear more profitable than it really is by understating depreciation expense. Depreciation expense can be understated by overstating the useful life of assets. Management can also overstate its assets by keeping obsolete and no longer used assets on its balance sheet. Maintaining obsolete assets on the balance sheet also overstates net income because losses on the disposal of these assets are not recorded.

Management may have a motive to understate payables, as this understates expenses and overstates net income. Usually the amount of payable understatement is not too great and such understatement can easily be detected.

A manager can overstate income and understate liabilities by treating deferred revenue as earned revenue. Essentially, this shady practice seeks to recognize revenue before it is actually earned. Such mischief often is not easy to detect, because it is not always clear when the earnings process is fully complete A manager also can understate current year expenses by claiming they are prepaid expenses. This amounts to a fraudulent claim that payments for a certain service benefit future accounting periods when, in fact they do not. Since prepaid expenses are recorded as an asset rather than an expense, expenses were understated; hence, profits were overstated