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Who Cooked the Books?

Stephen R. Goldberg and Joseph H. Godwin

BOOKS REVIEWED
Mulford, Charles W., and Eugene Comiskey. 2002. The Financial Numbers Game; Detecting Creative Accounting Practices (New York: John Wiley & Sons) Albrecht, W. Steve. 2003. Fraud Examination (Mason, Ohio: South-Western, a division of Thomson Learning) he two books reviewed address techniques to identify and investigate financial statements and employee fraud. As the reviews indicate, these books are recommended readings for and additions to the reference library of any financial or operational manager.

THE FINANCIAL NUMBERS GAME


The Financial Numbers Game; Detecting Creative Accounting Practices provides readers of financial statements with tools they can use to identify deceptive accounting practices. The text classifies those practices into five categories and provides copious examples to give the
2003 Wiley Periodicals, Inc.

Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.10140

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reader an understanding of how those practices achieve desired outcomes. The categories are: recognizing premature or fictitious revenue, aggressive capitalization and extended amortization policies, misreported assets and liabilities, getting creative with the income statement, and problems with cash flow reporting. The authors devote a chapter to each category and illuminate many of the practices that have misled investors. Relevant accounting practices are described for each category and examples are provided where particular firm managers have distorted financial results. Readers are provided with extensive checklists that can serve as invaluable tools for identifying practices that potentially misreport the underlying economics of transactions in which a firm engages. For example, the checklist related to recognition of premature or fictitious revenue, if followed, takes the reader through a companys revenue recognition practices and provides a number of crosschecks that can help validate or repudiate reported numbers. One crosscheck is determining whether or not the company has the physical

capacity to support reported revenue. The authors provide a number of measures that will aid financial statement users assessment of this important issue. Improper revenue recognition practices make up the lions share of enforcement actions brought by the Securities and Exchange Commission. In addition to a detailed description of accounting practices within the five categories mentioned above and tips on how to spot inappropriate accounting, the authors also provide a detailed look at the financial reporting landscape, motivations for aberrant behavior, Securities and Exchange Commission initiatives aimed at curtailing accounting abuse, and the views of financial professionals on the extent of the problem. Motivation to engage in accounting shenanigans often comes with declining economic fundamentals, management or auditor changes, changes in accounting standards, or investigations by a regulatory body such as the SEC. Often these shenanigans originate by stretching the boundaries and flexibility provided within generally accepted accounting principles.
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The Journal of Corporate Accounting & Finance

Beginning in 1998 with a speech by then-chairman Arthur Levitt, the SEC has been increasingly active in ferreting out financial misstatement. While this book went to press before all of the Enron accounting tricks were revealed, and does not include discussion of congressional action such as the SarbanesOxley bill and recent SEC action, it does describe in easy-to-read detail many of the regulatory events and cases that made it more difficult for Enron to continue. The authors report on a survey they conducted of financial professionals (CFOs, CPAs, financial analysts, academics, and advanced MBA students) regarding earnings management practices. Financial professionals generally agree on which accounting practices cross the line and that the practice is common. They agree that the major objectives of earnings management are to reduce earnings volatility, support stock prices, increase earnings-based compensation, and meet analysts earnings forecasts. This survey provides powerful confirmation of the extent of earnings management practices and steps that can detect it. The Financial Numbers Game; Detecting Creative Accounting Practices gives readers an understanding of the accounting practices that have misrepresented results for many companies and subsequently taken billions of dollars of capitalization out of the markets. It also provides tools that can help to prevent readers from suffering the same fate.

FRAUD EXAMINATIONS
Professor Steve Albrechts Fraud Examinations is a com-

prehensive treatise on the nature, causes, and investigation of fraud. Though largely written before the recent Enron debacle, its timing couldnt be better in light of recent massive corporate frauds la Enron and Adelphia. Thus, this material is both timely and topical. While this book is intended as a textbook, it is quite suitable as a quick study or reference on fraud, fraud investigations, and fraud management for accounting and finance professionals. Throughout the book, numerous narratives and excerpts describing actual frauds are created or excerpted from confessions, fraud investigation reports, and court documents. These examples are used to illustrate the nature of fraud, peek into the minds of perpetrators, and to punctuate the authors points. The description of actual frauds, sometimes in the perpetrators own words, are riveting and provide clear and sobering insights into when, why, and how highly trusted individuals commit fraud. Part one of the book is an introduction to fraud. The first two chapters describe types of fraud, the fraud environment, and characteristics of the perpetrators of fraud. Chapter 2 introduces the fraud triangle, which describes the three key elements common to all frauds: perceived pressure, perceived opportunity, and rationalization. The elements of perceived pressure and perceived opportunity are analogous to the familiar concepts of motive and opportunity as seen on television crime shows. Rationalization refers to the perpetrators reasons for viewing their actions as acceptable. The third chapter provides an introduction to the methods of managing fraud. Fraud prevention,

detection, and investigation techniques are introduced. Part two of the book details methods used to prevent fraud. Specific recommendations are made that would reduce or mitigate the elements of the fraud triangle. Standard methods to reduce fraud are presented, such as implementing strong internal controls and monitoring employees, as are more subtle approaches, such as creating a culture of honesty, openness, and assistance. Part three of the book deals with methods of fraud detection. Most of this will be familiar to anyone that has taken a university course in auditing. However, the excerpts and narratives describing actual frauds illustrate the importance of implementing the described procedures. Fraud investigation is addressed in part four. This section provides intimate details of the fraud examiners arsenal of weapons. Many of the techniques presented are typically associated with police detectives such as field surveillance, interrogation techniques, and public records searches. In fact, administering the Miranda warning and the rules of evidence are discussed in this section. A comprehensive treatment of the art of interviewing fraud suspects is presented, including how to word questions to get useful answers, how to read an interviewees body language, and how to deal with hostile interview subjects. Management fraud is covered in part five. The three chapters cover financial statement fraud, revenue and inventory fraud, and liability, asset, and inadequate disclosure fraud. Some of the examples used in this section are quite familiar to finance and accounting professionalsZZZBest, Phar-Mor,
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Crazy Eddies, Cendant, and Lincoln Savings and Loan. Most of the techniques described in this chapter are taught in a typical undergraduate auditing course, but are presented in this book from a fraud perspective. This section makes quite interesting reading in light of Enron and other recent accounting scandals. Part six of the book deals with specialized fraud issues. One chapter deals with frauds

against organizations and discusses embezzling, theft of inventory, and bribery. The following chapter deals with bankruptcy fraud and divorce, while the final chapter in this part deals with fraud in e-commerce. The e-commerce chapter is relatively light in content when compared to other chapters. The final section of the book deals with resolving fraud issues through civil and crimi-

nal litigation. The litigation process is described in both arenas, as is the role of a fraud examiner in litigation. Overall, this book is a comprehensive treatment of fraud, fraud management, and the investigation of fraud. I recommend it for its comprehensiveness, clarity, and the authors ability to make the abstract possibility of fraud real with the use of actual fraud cases.

Stephen R. Goldberg, Ph.D., CPA, and Joseph H. Godwin Ph.D., CPA, are professors of accounting at Grand Valley State University. Their teaching and research interests focus on financial accounting, international accounting, financial derivatives, and economic value added. They have published articles in a number of academic as well as practitioner-oriented journals.

2003 Wiley Periodicals, Inc.

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