ACFE Cookbook

Inventory inflation schemes come in many flavors

As I've pointed out in previous columns, revenue recognition schemes are the most common form of financial reporting fraud because companies sometimes take desperate measures to meet their revenue and earnings goals. But revenue recognition isn't the only avenue for artificially enhancing the appearance of financial health.

In this edition, I'll examine some recent cases involving improper accounting for inventory resulting in overstated assets. As with so many of the companies in the cases I profile, the players in two of the three cases were motivated primarily by a desire to meet published or internal goals for gross profit.

Each case is affected by the requirement in generally accepted accounting principles that inventory be carried in the financial statements at the lower of 1) its cost or 2) the value at which it could be sold.


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