Question

Discuss three types of accounting anomalies and define why they are important to a fraud investigation.

Answer 1

Any devivation from following the general accounting concepts and priciples are called Accounting anomalies. Any irregularity in the accounting statements from accounting practices are types of such anomalies. They are treated as fraudulent and unethical practices.

There are various types of accounting anomalies. Three such types are discussed below:

1. Unexplained journal entries - As per the dual accounting concept, every transaction should have a dual impact on the accounts of the financial statements. One should also consider the fact that impacted accounts much also be correct.

Say, Machinery (Fixed asset) is pruchased using cash for $500,000. The journal shows the following:

Inventory 500,000

To Cash 500,000

This is an unusual journal entry. Machines is a type of fixed asset which will be used by the organization for the generation of revenue over the next few or more years. This can not be treated as an inventory which is a raw material or unfinished product or finished product produced using the fixed assets like machinery.

2. Revaluation of Assets - It is advisable to proceed with the revaluation of fixed assets after every few years in order to get the book value closer to market value of the assets and show the true position or the strength of the organization. Anomaly comes into the picture when such revaluation is done at irregular intervals say at the time when the company needs loans. So, to strengthen the Balance Sheet, revaluation of assets is done.

Another example can be when the company is about to be insolvent, the organization may refrain from getting the assets revalued as the assets might be outdated/obsolete.

3. Changes in methods of valuations - Another type is the change in the valuation methods of inventory or the calculation of depreciation or amortization of goodwill based on what is most beneficial for the organization based on the current situation within the organization or economic conditions that the organization is facing.

Say, there are different valuation methods of stock - like FIFO and LIFO. FIFO method is more beneficial at times of inflation. Since the stock puchased earlier will be at lower cost, the cost of goods sold will reduce and increase the profit margin. Also, the closing stock value will increase too.

Such practices are important to be investaged to make sure that the financial statements show the true and fair value of the organization. Any such fraudulent activities should be identified and remediated in order to make the statements reliable. All the stakeholders like shareholders, loan institutions, management, creditors, government, tax authorities, customers, etc. make their decisions basis these Financial statements.