Introduction

This book is not intended to be a comprehensive guide to determining

fair values. Rather, it is designed to be a guide to the numerous complex

accounting rules that rely on fair valuations for the measurement of various

assets, liabilities, revenues, and expenses. It is these rules that are often

violated in connection with fraudulent financial reporting.

Yet, a discussion of the fair value accounting rules would be incomplete

without at least providing an overview of some of the key principles

involved in determining the fair value of an asset or a liability. After all,

fraudulent financial reporting can involve misapplication of an accounting

rule, misapplication of a valuation methodology, or a combination

of both.

Most fair value measurements utilize one of three approaches to determining

fair value:

1. Market approach

2. Income approach

3. Cost approach

Each approach is explained in SFAS 157, and these explanations are

provided in the following box. It is not the purpose of this book to provide

a detailed guide on how to value assets, liabilities, or businesses. Rather, it is

to provide an overview of the models as a basis for understanding where the

opportunities for fair value accounting fraud exist and to introduce certain

key theories that will be useful in understanding later discussions of specific

applications of fair value accounting.