What is a good response to.... One of the ways that financial information can fraudulently be reported to stakeholders is by overstating revenues. The motivation for this would be to show stakeholders that the company is exceeding expectations- or performing well. This can be done by recording revenues in a period they were not actually accrued in (like saying that revenues were earned before a product order was fulfilled), recording fictitious revenues, and even changing expenses to reflect incorrect periods or amounts. This “m” would be considered manipulation- because the accountant would be manipulating the financial statements (like the income statement) for potential personal gain. One case where this occurred was “last year involving Marvell Technology Group, the company was charged with pulling in sales from future quarters to close the gap between actual and forecasted revenue. The pull-ins amounted to as much as 16% of the company’s total quarterly revenues, according to the sec. The company settled for $5.5 million.” (Freedman, 2020) Freedman also says that “A company inflating its earnings by recognizing revenue related to fake contracts or other nonexistent sales is another common type of fraud. The attorneys pointed to an internal investigation at Chinese chain Luckin Coffee, which revealed it had recognized $300 million in fictitious revenue in 2019.” (2020) Inflation of revenues is a dangerous way to commit fraud, and even though it can be hard to detect- the detection will eventually happen and have large repercussions for the company, stakeholders (especially if the stock plummets) and anyone involved in the manipulation of the financial statements.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 11CYBK

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What is a good response to....

One of the ways that financial information can fraudulently be reported to stakeholders is by overstating revenues. The motivation for this would be to show stakeholders that the company is exceeding expectations- or performing well. This can be done by recording revenues in a period they were not actually accrued in (like saying that revenues were earned before a product order was fulfilled), recording fictitious revenues, and even changing expenses to reflect incorrect periods or amounts. This “m” would be considered manipulation- because the accountant would be manipulating the financial statements (like the income statement) for potential personal gain.

One case where this occurred was “last year involving Marvell Technology Group, the company was charged with pulling in sales from future quarters to close the gap between actual and forecasted revenue. The pull-ins amounted to as much as 16% of the company’s total quarterly revenues, according to the sec. The company settled for $5.5 million.” (Freedman, 2020) Freedman also says that “A company inflating its earnings by recognizing revenue related to fake contracts or other nonexistent sales is another common type of fraud. The attorneys pointed to an internal investigation at Chinese chain Luckin Coffee, which revealed it had recognized $300 million in fictitious revenue in 2019.” (2020) Inflation of revenues is a dangerous way to commit fraud, and even though it can be hard to detect- the detection will eventually happen and have large repercussions for the company, stakeholders (especially if the stock plummets) and anyone involved in the manipulation of the financial statements.

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