Deck 14: Financial Statement Fraud

Question 1

What is a motive for financial statement fraud?

A) Covering up poor performance.
B) Capital acquisition.
C) Generic greed.
D) All of the above.

Answer 1

D

Question 2

By non-disclose of good news, management has:

A) Protected the company from bad stock valuation on the market.
B) Cost investors who have sold their stock from realizing its true value.
C) Let those who have purchased stock on the market pay a higher price than they should have.
D) All of the above.

Answer 2

B

Question 3

The enforcing agency for insider trading publishes its actions under what heading on its web site?

A) Accounting and Auditing Enforcement Release.
B) Privacy Act release information.
C) Insider Trading Enforcement Release.
D) Law breakers and fraud perpetrators exposes.

Answer 3

A

Question 4

By non-disclosure of bad news, management has:

A) Protected the company from bad stock valuation on the market.
B) Saved investors the embarrassment of holding declining stock.
C) Let those who have purchased stock on the market pay a higher price than they should have.
D) All of the above.

Question 5

Most frauds span multiple fiscal periods, with the average fraud time being approximately:

A) Two quarters.
B) Two years.
C) Three years.
D) Five years.

Question 6

Who performs enforcement actions for insider trading?

A) IRS.
B) SEC.
C) DHS.
D) U.S. District Courts.

Question 7

In order for actual losses to occur in the bad-news case, the buyer must:

A) Buy and sell within the FCIIP period.
B) Buy before the FCIIP period and sell within it.
C) Buy before the FCIIP period and sell after it.
D) Buy within the FCIIP period and sell after it.

Question 8

Financial statement fraud is:

A) Putting forth another company's financial statements as your own.
B) Any intentional or grossly-negligent violation of GAAP that is undisclosed and materially affects any financial statement.
C) Any intentional or grossly-negligent violation of GAAP that is undisclosed and affects any financial statement.
D) When the CEO and CFO do personally sign the financial statements.

Question 9

Financial statement fraud is typically committed when what type of conditions are present?

A) Small cap stocks, those whose assets are less than $100 million.
B) In companies with lower earnings, in companies with earnings problems, or downward trends in earnings.
C) Has no audit committee, or none of the audit committee members is highly skilled, or the audit committee seldom meets.
D) All of the above.

Question 10

What percentage of assets is typically involved in financial statement fraud?

A) 5%.
B) 10%.
C) 25%.
D) 50%.

Question 11

The period from when fraud-related losses accrue to shareholders is between the date the fraudulent information is published and the date that the corrected information is published. What is this referred to?

A) Limbo.
B) Fraud-related investor portfolio loss period.
C) Fraud-created insider information period.
D) Potential investor portfolio loss period.

Question 12

Which of the following is an example of improper accounting treatment?

A) Transfers of goods from related companies might be improperly recorded as sales.
B) Sham transactions and legitimate transactions that are not properly recorded.
C) Transactions can be intentionally misprocessed in order to produce fraudulent account balances.
D) All of the above.

Question 13

The scheme involving recording fictitious sales and frequently includes falsified sales, inventory, and shipping records is called:

A) Sham sales.
B) Recognition of conditional sales.
C) Improper cutoff of sales.
D) Consignment sales.

Question 14

Normally, managers will not hide good news because:

A) It typically gives them raises and bonuses.
B) Good news travels fast.
C) This type of news is not required to be disclosed.
D) Managers can buy stock at a lower price by executing their stock options.

Question 15

The scheme where normally the books are "closed" at the end of each reporting period, and sales that occur after the closing date do not appear in the current-period income statement is called:

A) Sham sales.
B) Recognition of conditional sales.
C) Improper cutoff of sales.
D) Consignment sales.

Question 16

About half of all financial statement fraud crimes involve:

A) Understatement of liabilities.
B) Overstatement of capital.
C) Overstatement of assets and revenues.
D) Alteration of source documents.

Question 17

The classic definition of fraud is:

A) An intentional misrepresentation of fact by some perpetrator.
B) A reliance upon the misrepresentation by some victim.
C) An injury to the victim resulting from reliance upon the misrepresentation.
D) All of the above.

Question 18

What is a consequence of financial fraud for managers?

A) They are immediately fired.
B) They must personally apologize to everyone effected.
C) They are exempt from consequences.
D) They are often named in civil suits.

Question 19

Who is financial statement fraud harmful to?

A) Investors.
B) Markets.
C) Society.
D) All of the above.

Question 20

Which of the following would be involved in a scheme involving overstating assets:

A) Inventories.
B) Accounts receivables.
C) Property, plant and equipment.
D) Consignment sales.

Question 21

How does SOX hope to prevent financial statement fraud?

A) Through hard penalties for management.
B) By having management sign the financial statements.
C) By prompting strong oversight and governance within the business.
D) All of the above.

Question 22

In the majority of cases, an IRS enforcement action for FSF is associated with bankruptcy or a change in ownership.

Question 23

Any lack of independence between management, internal auditors, and external auditors undermines the basic structure that prevents financial statement fraud. What type of red flag does this represent?

A) Internal control process.
B) Management style.
C) Personnel practices and environment.
D) The government structure.

Question 24

The general philosophy behind SOX is to minimize financial statement fraud by promoting strong corporate governance and organizational oversight by 6 groups, which include management, the board of directors, the audit committee, management, internal auditors, external auditors, and public oversight groups.

Question 25

The general methods for financial statement fraud involve improper accounting treatment such as leaving liabilities off the balance sheet.

Question 26

Normally, markets reward profitability.

Question 27

Nearly half of the audit reports indicate some type of anomaly, such as a change of auditors, doubts about the company's ability to continue as a going concern, a change in accounting principles, or a litigation issue.

Question 28

Management's routine use of non-fraudulent accounting and economic discretion to smooth earnings is called:

A) Financial manipulation.
B) Earnings management.
C) Corporate financial management.
D) Asset management.

Question 29

When a company makes a very large one-time write off, it's said to take a(n):

A) Aggressive accounting position.
B) Big bath.
C) Earnings smoothing approach.
D) Legitimate discretion approach.

Question 30

Fraud-related losses do not accrue for those who both buy and sell their shares during the FCIIP.

Question 31

When Nortel announced that it was taking $18.4 billion in charges for restructuring costs, bad customer debts, and obsolete inventory, it was taking a(n):

A) Big bath.
B) One time write down.
C) Section 179 allowance.
D) All of the above.

Question 32

The only way with withholding of goodnews/badnews hurts investors is if corporate management sells some of their own shares.

Question 33

A CEO talks the CFO into depreciating new assets for 10 years instead of the 7 years it should be depreciated for. This is an example of:

A) Earnings manipulation.
B) Legitimate discretion.
C) Aggressive accounting techniques.
D) Ratio manipulation.

Question 34

Schemes for overstating revenues include manipulating inventories and receivables.

Question 35

One of the biggest lessons learned by studying cases of financial statement fraud is that:

A) Management will always have the power of greed behind them.
B) Only fools believe in fraudulent financial statements.
C) Auditors can only certify financial statements if they are paid off.
D) People who are making money from fraudulent financial statements want to believe in them.

Question 36

Earnings management is:

A) Illegal as defined by SOX.
B) Illegal as defined by the IRS.
C) Illegal as defined by the SEc.
D) Legal, to a certain extent.

Question 37

How do public oversight boards help prevent financial statement fraud?

A) They perform post-audit evaluation of financial statements.
B) They set standards for auditors.
C) They educate CEOs and CFOs on ways to prevent financial statement fraud.
D) They help enforce SOX standards within corporations.

Question 38

The Committee of Sponsoring Organizations for the Treadway Commission studied financial statement fraud cases and developed a taxonomy of financial statement fraud schemes applicable to publicly-traded companies that included Improper Revenue Recognition and Misappropriation of Assets.

Question 39

If management decides to use an inventory method that will provide them with a higher net income, this is an example of:

A) Legitimate discretion.
B) Financial statement fraud.
C) Manipulation.
D) Aggressive accounting techniques.

Question 40

The median amount of the fraud is approximately 50% of the median total assets.

Question 41

Describe big bath accounting and what would make a company engage in it.

Question 42

Describe some of the nature of financial statement fraud.

Question 43

What are some consequences to companies and their managers for financial statement fraud?

Question 44

What is financial statement fraud and what are its three elements?

Question 45

What are some motivators to financial statement fraud?

Question 46

Name at least three schemes for overstating revenues.

Question 47

Red flags exist when it comes to identifying financial statement fraud. Name and describe three of them.

Question 48

Why would management engage in earnings smoothing?

Question 49

What are some legitimate discretion choices that management can make?

Question 50

What is the general philosophy of SOX for preventing financial statement fraud?