Question

Define and explain each of the following types of common accounting frauds.  Make sure to explain what types of accounts/transactions are considered in each fraud instance

What are some companies that have done these frauds

1.Bill and Hold

2.Lapping

3. Channel Stuffing

4.Improper Assest capitlaization

5.Cookie Jar Reserves

Answer 1

The following types of common accounting frauds:-

1.) Bill and Hold:- “Bill and Hold” schemes are another common method of bypassing the delivery requirement. As its name implies, a legitimate sales order is received, processed, and ready for shipment. The customer however, for whatever reason, may not be ready, willing, or able to accept delivery of the product at that particular point in time.

• The date by which the seller expects payment, and whether the seller has modified its normal billing and credit terms for this buyer;
• The seller's past experiences with and pattern of bill and hold transactions;
• Whether the buyer has the expected risk of loss in the event of a decline in the market value of goods;
• Whether the seller's custodial risks are insurable and insured; and
• Whether extended procedures are necessary in order to assure that there are no exceptions to the buyer's commitment to accept and pay for the goods sold (i.e., that the business reasons for the bill and hold have not introduced a contingency to the buyer's commitment).

The  companies that have done these frauds

• Risk of ownership has passed to the buyer;
• Customer has made a fixed commitment to purchase the goods, preferably in written documentation;
• Buyer must request that the transaction be on a bill and hold basis;
• Buyer must have a substantial business purpose for ordering the goods on a bill and hold basis;
• Delivery must be fixed and on a schedule that is reasonable and consistent with the buyer's business purpose;
• Seller must not retain any specific performance obligations under the agreement such that the earning process is not complete;
• Ordered goods must be segregated from the seller's inventory and not be subject to being used to fill other orders; and
• Product must be complete and ready for shipment.

2.)Improper Assest capitlaization:- Improper reporting of assets is another way for companies to overstate earnings. A direct relationship exists between overstatement of assets/understatement of liabilities on the balance sheet and the inflation of earnings.  

• Creating fictitious assets;
• Manipulating balances of legitimate assets with the intent to overstate value;
• Understating liabilities or expenses, including failing to record (or deliberately under estimating) accrued expenses, environmental litigation liabilities and other business problems;
• Misstating inter-company expenses; and
• Manipulating foreign currency exchanges.

3.)Lapping:- Lapping generally involves converting one customer’s payment and then using a subsequent payment, usually from another customer, to cover the payment converted from the previous customer's account.

example:-  the perpetrator will steals the payment intended for customer A’s account. When a payment is received from customer B, the thief credits it to A’s account. And when customer C pays, that money is credited to B.

• Lapping tends to increase at exponential rates and lapping schemes often tend to reveal themselves because the employee is unable to keep track or obtain additional payments to cover up the prior skimming.
• The controls, analytical and other indicators that apply to skimming also apply to lapping.  

4.)  Channel Stuffing:- Channel stuffing refers to the practice of offering deep discounts, extended payment terms or other concessions to customers to induce the sale of products in the current period, when they would not have not been otherwise sold until later periods, if at all.

Channel stuffing often is indicated by an increase in shipments, which is usually accompanied by an increase in shipping costs, at or near the end of period.   Where these circumstances occur.

The  companies that have done these frauds

• inquire whether the goods were sold at steep discounts.
• review customer contracts and side agreements for unusual discounts in exchange for sales and rights of return provisions.

• inquire of sales personnel and shipping personnel regarding management influence to alter normal sales channel requirements.

5.) Cookie Jar Reserves:- "Cookie jar" is slang for a reserve of cash that is not disclosed on a company’s financial statements, or that is listed as funds earmarked for a liability that does not currently exist. Cookie jar accounting is used to create such cash reserves in good years so the money can be used to offset poor earnings in bad years.

A common form of cookie jar accounting is to “recognize” or state a liability when the company in fact has not incurred a liability. For example, company executives may say they plan to reorganize or restructure the firm.

since doing so can mislead analysts into issuing more favorable reports about them to the investment community. This approach to reporting earnings does not reflect actual results, and so can be considered fraudulent reporting.