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Financial Statement Fraud - Sarbanes-Oxley

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1. What are the differences between financial statement fraud that occurs on the balance sheet and that which occurs on the income statement? In your answer, discuss the different types of financial statement fraud, the timing of the fraud, and the recognition of the fraud by the marketplace.

2 Contrast the effect of financial statement fraud on the following:
a. The stockholder.

b. The corporation.

c. The corporation's executives/directors.

d. The market as a whole.

e. Society in general.

3. The concept of fraud involves the legal concept of intent. What intent must be shown for there to be financial statement fraud? Would the same standards apply in other set- tings? In other words, is there a lower threshold for fraud in a financial statement setting than in other legal matters?

4. Discuss the difference between acting "knowingly" and acting "knowingly and willfully."

5 Why would a company that is not required to file with the SEC want to comply with the provisions of Sarbanes-Oxley? Why would the company not want to comply with SOX? Specifically address the type of company that is required to comply with the act. Discuss the various costs involved in SOX compliance. Does public perception play a role in your answer? What would happen if a company that is not required to comply is taken over by a company that is required to comply? How would this affect your answer?

6 Why does Sarbanes-Oxley require one member of the audit committee of a publicly traded company to be an expert in finance? Discuss the composition of the audit committee. Would the same rules apply to a company that specializes in finance? Are there any similarities and/or differences between the composition of an audit committee and that of the PCAOB?

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Solution Summary

The differences between financial statement fraud that occurs on the balance sheet and that which occurs on the income statement. The effects of financial statement fraud on stockholders, corporations, corporations executives/directors, market as a whole and society in general are given.

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http://smallbusiness.chron.com/warning-signs-fraud-income-statement-55611.html
http://www.wisehart-wisehart.com/Articles/How%20Fraud%20Happens%20-%20Balancing%20Acts.pdf
http://blj.ucdavis.edu/archives/vol-5-no-2/the-sox-effect.html
http://pcaobus.org/About/pages/default.aspx

1. What are the differences between financial statement fraud that occurs on the balance sheet and that which occurs on the income statement? In your answer, discuss the different types of financial statement fraud, the timing of the fraud, and the recognition of the fraud by the marketplace.

Fraud that occurs on the financial income statement contains false information pertaining inaccurate and false revenues or assets as well as the deliberate concealment of liabilities. Companies or individuals engaged in this type of financial statement fraud will use fictitious revenue from sales and other types of inaccuracies such as false information regarding expenses to portray a deceptive and fraudulent income statement using non-existent fixed assets as well as false or misleading disclosures or adjustments while also concealing liabilities.

In contrast to the financial income statement, which is what most investigators focus on, the financial balance sheet, which represents a financial snapshot of the entity is often overlooked by auditors. Because of this, many fraudsters hide money in places that are not normally reviewed as carefully as revenue items. Fraud usually occurs with balance sheets when inaccuracies are present regarding intangible assets, buildings and improvements; inventory; investments in company X, Y, Z, and prepaid expenses. Fraud that involves balance sheet loading is another form of financial balance sheet fraud.

2 Contrast the effect of financial statement fraud on the following:
a. The stockholder.

Stockholders can lose life savings, investments, and financial earnings because of fraud, but if the fraud is not detected, they can also benefit from "willful" or unwillful ignorance as companies such as Enron were able to keep stockholders happy until the fraud was exposed and they lost everything.

b. The corporation.

This depends on whether the corporation was an ...

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