Excerpted from the NEW Fraud Examiners Manual, 2003 U.S. Edition ©2003 Association of Certified Fraud Examiners, Austin , Texas
Fictitious revenues and timing differences are two of five classifications of common financial statement schemes.
Fraud in financial statements takes the form of overstated assets or revenue or understated liabilities and expenses.
Overstating assets and revenues falsely reflects a financially stronger company by inclusion of fictitious asset costs or artificial revenues. Understated liabilities and expenses are shown through exclusion of costs or financial obligations. Both methods result in increased equity and net worth for the company. This overstatement and/or understatement results in increased earnings per share or partnership profit interests or a more stable picture of the company's true situation.
Because the maintenance of financial records involves a double-entry system, fraudulent accounting entries always affect at least two accounts and, therefore, at least two categories on the financial statements. While the areas described below reflect their financial statement classifications, keep in mind that the other side of the fraudulent transaction exists elsewhere. It's common for schemes to involve a combination of several methods.
The five classifications of financial statement schemes are fictitious revenues, timing differences, improper asset valuations, concealed liabilities and expenses, and improper disclosures.
We'll deal here with just fictitious revenues and timing differences. (See the ACFE's Fraud Examiners Manual for further discussion of the other three classifications.)