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By Stanley W. SelfFull-Time Faculty, School of
As discussed in
the related December article, “Precautions to Help Avoid Financial and Credit Card Fraud,” financial fraud takes many forms.
Some types are
less obvious, and the effect on consumers is not directly apparent.
Depending upon the
industry and complexity of an acquisition, a variety of frauds are possible. The
specific acquisition involved the purchase of a large truck stop. The subject is
large in terms of both business volume and physical presence (about 100 acres).
A number of separate financial frauds were discovered during the due diligence process.
The only example presented will include cash and accounts receivable (AR) fraud.
require audits to be performed by professionals experienced in the industry. Understanding all aspects of a business
operation is critical to an audit, due diligence, and financial fraud investigation.
journals dedicated specifically to an industry may improve familiarity with
standard terminology and procedures. Becoming acquainted with peers and
networking can be invaluable methods for generating information.
metrics used to evaluate performance of any industry is vital to any due
diligence process. Many sources of information are available; one valuable
tactic used to build understanding of the truck stop business would be to
conduct informal interviews with personnel in different truck stops operating
in the region.
Although business attire
is usually appropriate, a financial researcher may need to modify his or her appearance
to be received positively in some situations. Wearing clothing that resembles a truck driver’s attire into a truck
stop may offer more opportunity for open conversation than wearing the type of
clothing that people might associate with the IRS.
Another effective tool
is to allow information to flow freely without making the research objective obvious.
Maintaining an informal demeanor may facilitate free-flowing information.
metrics of each component of truck stop operations would be an essential first step
for investigating financial accounting fraud in that environment. Financial
analysis of industry standards applies to due diligence.
component of truck stop operations involves AR, including: in-house accounts,
different fuel and national credit card clearing-house operations. There are many layers of sales, discounts,
payments schedules, and multiple complex banking relationships. Analysis of the cash cycle for previous
periods as compared to the cash cycle for the period leading up to the
acquisition revealed an anomaly. Significant analysis was needed to unravel the cash account, billing
statement, and remittance discrepancies.
By analyzing each of
many bank statements, a point of precise reconciliation was determined. Then,
by progressive reconciliation through all periods up to the date of
acquisition, a $53,000 discrepancy was discovered. Subsequent analysis revealed
$53,000 had been posted to the cash accounts but had not been posted to the
individual customer AR. That inflated the assets because the same $53,000 was
reflected twice in current assets (once as cash, and again as an open AR).
To unravel the
discrepancy, a search of all AR subsidiary accounts was necessary. Analysis
proved that those amounts had been credited to cash sales. This finding
corresponded to an unexplained increase in the profit margin for the period.
statement analysis must assemble facts. Financial analysis is a critical
component of the process of uncovering financial fraud. Equally important would
be industry-specific knowledge. Interview skills were invaluable. But perhaps the most important tool
for protecting financial heath is old fashioned common sense.
Interested in this career? Check out Kaplan University's Business resources here.
Stanley Self is a
full-time faculty member at Kaplan University. The views
expressed in this article are solely those of the author and do not represent
the view of Kaplan University.
By Cynthia Waddell, PhD, CPA, CFE
By Jerry Taylor
By Geoffrey Vanderpal
By Dr. Denise Schoenherr
By Stanley W. Self, CFE
By Rachel Byers, Full-Time Faculty, School of Business
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