Fair Value Accounting Fraud E-Book

Gerard M. Zack

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 367

Veröffentlichungsjahr: 2009

Beschreibung

Essential guidance on the new fair value rules for accounting managers, auditors, and fraud investigators Fair Value accounting is emerging as the next prime opportunity for financial statement fraud. Explaining the many complex applications of fair value accounting in the preparation of financial statements, Fair Value Accounting Fraud offers timely guidance on an up-and-coming issue as U.S. and international accounting rules pertaining to the use of fair value accounting continue to change. You'll find discussion of * U.S. GAAP and IFRS rules on fair value accounting issues, highlighting the areas most vulnerable to fraud * Explanations of 75 categories of fair value accounting fraud schemes * Fraud risk checklist that you can put to immediate use * Practical detection techniques useful for auditors, investigators and others who rely on financial statements * Expert advice from Gerard Zack, CFE, CPA, author of Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection Comparing US accounting standards to International Financial Reporting Standards-thereby making this book useful worldwide- Fair Value Accounting Fraud helps you understand the new rules and develop new auditing and investigative techniques to enable you to detect potential fraud.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

How This Book Is Organized

Glossary of Abbreviations Used in This Book

Acknowledgements

PART I - Introduction to Fair Value Accounting Fraud

CHAPTER 1 - Overview of Financial Statement Fraud and Fair Value Accounting

Introduction to Financial Reporting Fraud

What Makes It Fraud?

Why Financial Reporting Fraud Is Perpetrated

Using One Fraud to Hide Another

CHAPTER 2 - The Use of Fair Value in Financial Statements

Historical Cost versus Fair Value

Sources of Accounting Principles

U.S. GAAP versus IFRS

Fair Value Option Added for U.S. GAAP

Fair Value Defined

International Convergence

Some Principles of Financial Statement Presentation

Effective Dates of Accounting Standards

Impact of Fraud on Financial Statements

CHAPTER 3 - Methods of Determining Fair Value

Introduction

Market Approach

Income Approach

Cost Approach

Internal versus Externally Developed Valuations

Inputs to Valuation Methods

Fair Value Guidance under IFRS

Availability of Market Evidence

PART II - Asset-Based Schemes

CHAPTER 4 - Investments in Debt and Publicly Traded Equity Securities

Scope of Investments Covered

Sources of U.S. GAAP and IFRS

Classification and Treatment—U.S. GAAP

Classification and Treatment—IFRS

Reclassifications in General

Reclassifications from the Held-to-Maturity Category

Determination of Fair Value

Active versus Inactive Markets

Temporary versus Other-than-Temporary Impairments—U.S. GAAP

Impairment Losses—IFRS

Summary of Fraud Risks

CHAPTER 5 - Ownership Interests in Nonpublic Entities

Sources of U.S. GAAP and IFRS

Introduction

Consolidated Financial Statements

Jointly Controlled Entities versus Jointly Controlled Assets

Equity Method Investments

Proportionate Consolidation

Fair Value Option

CHAPTER 6 - Loans and Receivables

Sources of U.S. GAAP and IFRS

Recognition and Measurement—U.S. GAAP

Recognition and Measurement—IFRS

CHAPTER 7 - Intangible Assets and Goodwill

Sources of U.S. GAAP and IFRS

Asset versus Expense

Web Site Costs

Measurement

Finite Life Intangible Assets

Residual Value

Indefinite Life Intangible Assets

Impairment Losses

Concluding Remarks

CHAPTER 8 - Business Combinations

Sources of U.S. GAAP and IFRS

Business Combination versus Asset Acquisition

Accounting for Business Combinations

Identification of Intangible Assets

Business Combinations Achieved in Stages

CHAPTER 9 - Asset Impairments

Sources of U.S. GAAP and IFRS

Definition of an Impairment Loss

When to Test for Impairment

Indicators of Impairment of Assets

Extent of Impairment Loss

Reversal of Previous Impairment Losses

CHAPTER 10 - Property and Equipment (Including Investment Properties)

Sources of U.S. GAAP and IFRS

Initial Recognition

Measurement after Initial Recognition

Investment Property

Impairment Losses

PART III - Liability-Based Schemes

CHAPTER 11 - Debt Obligations

Sources of U.S. GAAP and IFRS

Measurement

Fair Value Option

Valuation of Debt

CHAPTER 12 - Deferred Revenue

Sources of U.S. GAAP and IFRS

Recognition—Customer Loyalty Programs

Multiple Deliverable Arrangements

CHAPTER 13 - Asset Retirement Obligations

Sources of U.S. GAAP and IFRS

Recognition—U.S. GAAP

Recognition—IFRS

Can a Reliable Estimate Be Determined?

Measuring and Recording an Asset Retirement Obligation

Summary—Comparison of U.S. GAAP and IFRS

CHAPTER 14 - Guarantees

Sources of U.S. GAAP and IFRS

Recognition—U.S. GAAP

Measurement

Recognition—IFRS

PART IV - Other Fair Value Accounting Fraud Issues

CHAPTER 15 - Derivatives and Hedging

Sources of U.S. GAAP and IFRS

Definitions and Treatment—U.S. GAAP

Definitions and Treatment—IFRS

Measurement

Embedded Derivatives

CHAPTER 16 - Assets or Liabilities of Sponsors of Employee Benefit Plans

Sources of U.S. GAAP and IFRS

Recognition and Measurement—U.S. GAAP

Recognition and Measurement—IFRS

CHAPTER 17 - Contingencies and Provisions

Sources of U.S. GAAP and IFRS

Recognition—U.S. GAAP

Amount of Loss to Be Recognized

Recognition—IFRS

Measurement

Comparison of U.S. GAAP and IFRS

CHAPTER 18 - Share-Based Transactions

Sources of U.S. GAAP and IFRS

Recognition—U.S. GAAP

Measurement—U.S. GAAP

Recognition—IFRS

Measurement—IFRS

CHAPTER 19 - Nonmonetary Transactions

Sources of U.S. GAAP and IFRS

Recognition and Measurement—U.S. GAAP

Recognition and Measurement—IFRS

Advertising Barter Transactions—U.S. GAAP

Advertising Barter Transactions—IFRS

CHAPTER 20 - Special Fair Value Issues of Not-for-Profit Organizations

Introduction

Noncash Contributions of Assets

Contributed Use of Assets

Promises to Give

Contributed Services

Matching Requirements

CHAPTER 21 - Fair Value Disclosure Issues

Introduction

Sources of Disclosure Requirements

Financial Instruments

Impairment Losses

Uncertainties

PART V - Detection of Fair Value Accounting Fraud

CHAPTER 22 - A Framework for Detecting Fair Value Accounting Fraud

Assessing the Risk of Fraud

Understanding How Fair Value Impacts the Financial Statements

External Factors that Indicate Risk

Internal Risk Factors

Materiality

Internal Controls over Fair Value Accounting

The Risk of Management Override

Framework for Fair Value Accounting Fraud Detection

Auditing Standards

Auditor Independence

CHAPTER 23 - Use of Ratios and Other Analytical Procedures

Analytical Procedures as a Fraud Detection Tool

Horizontal Analysis

Vertical Analysis

Operating Ratios

Customized Ratios

Appendix A - Summary Checklist of Fair Value Accounting Fraud Risks

Appendix B - SEC Office of the Chief Accountant and FASB Staff Clarifications ...

Appendix C - Internal Controls over Fair Value Accounting Applications

Bibliography

About the Author

Index

Copyright © 2009 by Gerard M. Zack. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Zack, Gerard M.

Fair value accounting fraud : new global risks and detection techniques/Gerard M. Zack.

p. cm. Includes bibliographical references and index.

eISBN : 978-0-470-52737-5

1. Misleading financial statements. 2. Accounting fraud. 3. Fair value-Accounting. I. Title.

HF5681.B2Z234 2009 657’.3-dc22

2009010848

Portions of various FASB documents, copyright © by the Financial Accounting Foundation, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A., are reprinted with permission. Complete copies of these documents are available from the FAF.

For additional information, visit www.fasb.org.

Portions of various IASB documents, copyright © by the International Accounting Standards Committee Foundation, First Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom, are reprinted with permission.

For additional information, visit www.iasb.org.uk.

This book is dedicated to my brothers, Bill and Ray. I am so lucky to have two brothers who have always been such great role models and who continue to be so deserving of my admiration and respect, yet who are also my best friends. I love you both dearly.

Preface

Depending on what you have read and who you have listened to, you may have formed the opinion that fair value accounting has had one or more of the following relationships with the global financial crisis that continues to worsen in 2009:

• It was one of the direct causes of the crisis.

• It exacerbated the crisis, which was initially caused by other factors.

• It hid or disguised the crisis for months, resulting in a delayed initial response to the crisis.

• It had nothing to do with the crisis—but it sure is fun to blame crises on accountants.

Fair value accounting is the accounting profession’s equivalent of the automobile commercials you have seen on television, showing a vehicle racing around an obstacle course or bouncing over hills, along with a disclaimer saying something to the effect that “This is a professional stunt driver on a closed course. Do not try this at home!”

Fair value accounting is not for the timid. It is often not precise. It makes some people uncomfortable (they are called auditors). It involves a tremendous amount of judgment and estimation. It also frequently requires a highly specialized expertise. And whenever accounting involves a significant amount of judgment and estimation, it becomes infinitely more susceptible to manipulation and fraud.

The role that fair value accounting may have played in connection with the current economic mess is an interesting one to debate, but is not really the subject of this book. The issue that cannot be disputed, however, is that the accounting rules regarding the use of fair value accounting are extremely complicated. This complexity has most certainly led to inconsistencies in the application of these rules. While most of these inconsistencies are likely the result of honest mistakes and, in some cases, a poor understanding of the rules, some will inevitably be determined to be more deliberate. As a result, there are bound to be many cases of fair value accounting fraud in the coming years. Financial reporting fraud is nothing new. But the techniques used to perpetrate it change over time. And one of the trade-offs for the many benefits of fair value accounting is that it is likely to be the basis for some of the next major financial reporting frauds.

Regardless of whether you favor or dislike the use of fair value accounting, one thing most people agree on is that the rules are very complicated. In its December 2008 report on the use of fair value accounting in the United States, the Securities and Exchange Commission soundly endorsed the use of fair value accounting. It even encouraged the expansion of fair value applications in the financial statements. However, the SEC cautioned that better, more practical guidance is badly needed, and some of the fair value accounting standards are in of need clarification and simplification. Starting in January 2009 and continuing into April, the Financial Accounting Standards Board has taken steps to respond to the SEC’s mandate for improved guidance. No doubt, additional guidance is on the way. The accounting standards are far from perfect, but as FASB and the International Accounting Standards Board continue to work together, greater consistency and clearer rules will hopefully result.

It is with the complexity of these rules in mind that I have chosen to tackle the subject of fair value accounting fraud with this book. The rules in the United States share many attributes with the rules used in countries that recognize the International Financial Reporting Standards. Yet there are many differences as well.

The purpose of this book is to raise awareness of the many risks of fraud based on how fair value accounting is utilized in the preparation of financial statements and how those applications differ under U.S. and international accounting standards. This book is not a guide on how to perform valuations. But it is designed to provide readers with an overview of the fair value applications and some of the most commonly used methods, especially as these subjects relate to the primary focus of this book—the risk of financial reporting fraud.

Gerard M. Zack April 2009

How This Book Is Organized

This book is organized into five parts:

Part I Introduction to Fair Value Accounting Fraud

Part II Asset-Based Schemes

Part III Liability-Based Schemes

Part IV Other Fair Value Accounting Fraud Issues

Part V Detection of Fair Value Accounting Fraud

Beginning in Chapter 2 and continuing through the end of Part IV, as fraud schemes are introduced, each will be highlighted in a special fraud risk text box. Each fraud scheme has been assigned a number, the first part of which corresponds to the chapter number. The fraud risks identified in Chapters 2 and 3 are broad risks that could apply to any application of fair value accounting. The risks identified in Chapters 4 through 21 are specialized risks associated with the specific accounting topic addressed in each chapter.

In the sections of the book surrounding each fraud risk text box, the details of the accounting rules and how those rules would be violated in connection with each fraud scheme are explained. All of the fraud schemes are listed in Appendix A for your reference.

Glossary of Abbreviations Used in This Book

Numerous acronyms and abbreviations are used throughout this book, starting in Chapter 2. Here are some of the most commonly used abbreviations. Each will be explained further as they are introduced in the book.

Acknowledgments

I want to thank April for many things, but especially for the love and support you have provided to me during a challenging period in my life. Words cannot adequately express my appreciation and love.

I also want to thank the great team at John Wiley & Sons, specifically:

Tim Burgard, Acquisitions Editor

Lisa Vuoncino, Production Editor

Helen Cho, Senior Editorial Assistant

You have made this process feel very much like a team effort.

PART I

Introduction to Fair Value Accounting Fraud

In this introductory section, the most important concepts of financial statement fraud and fair value accounting are introduced. To understand how to detect fair value accounting fraud, it is important to:

• Understand why and how financial statement fraud of any type is perpetrated

• Understand what is meant by fair value accounting and its broad applications in today’s world

• Understand some of the core concepts associated with fair value accounting, including a basic understanding of the various methodologies used in determining fair value of an asset or liability

That is the purpose of Part I. It is only with this level of understanding that the fair value accounting issues and fraud risks explained in Parts II through IV will be fully understood.

CHAPTER 1

Overview of Financial Statement Fraud and Fair Value Accounting

Introduction to Financial Reporting Fraud

Anyone who has read a newspaper or watched the evening news in recent years is well aware that fraudulent financial reporting by big businesses has reached alarming levels. Equally startling is the frequency of fraudulent financial reporting by small businesses—as many bankers and government agencies will confirm—and even by non-business entities such as not-for-profit organizations.