Question

Adventures in Wild Life conducts tours of wildlife reserves around the world. They have recently purchased a new lodge in Adak, Alaska, utilizing a 4% mortgage from Bank of Alaska. As part of the agreement they must provide an annual report showing they are achieving a current ratio of 1.2 or better. In order to ensure they achieve this ratio, the CEO requested the CFO to reclassify the long-term debt investments into brokerage accounts to allow them to sell them soon. The adjustments were done knowing the company was not planning on selling these long-term investments. The economy took a downturn and the business saw revenues drop more than 60%.

1. Explain how the move of long-term investments to brokerage investments would change the financial statements and how this movement would affect the current ratio.
2. What information on the financial statements should have shown the bank of this movement?
3. Determine if there was fraud in this movement and the type of fraud.

Answer 1

Long term investments are held with the purpose of holding them for a period greater than 1 year. They are generally valued at cost and not revalued unless there is permanent fall in investment value.

Any reclassification of Long Term Investment into Brokerage Accounts (or current investments) would have direct impact on the financial statements and current Ratio.

Impact on Financial Statements:

The reclassification would show a movement in Long Term Investments and Current Investments.

Impact on Current Ratio:

The current ratio would rise as a result of reclassification due to increase in current assets.

Bank could have easily identified by looking at comparative figures of previous year and current year where the fall in Long Term Investments value would be visible.

The above reclassification was a fraud to obtain financial assistance from Banks and could be classified as a Financial Fraud.