Detecting Accounting Fraud 1st Edition by Cecil Jackson

Exercise 4

Why is an increase in accumulated negative amortization from one year to the next a signal that a decrease in earnings may follow? (a) This shows that there may have been an increase in a high-risk portion of a lender's loan portfolio.
(b) A loan loss may follow because once the unpaid interest on a pay-option ARM loan reaches a certain percentage of principal borrowed, the loan repayment resets to a higher amount to cover the interest payments, and borrowers may be unable to pay the subsequent higher monthly payment after the payment resets and they may default.
(c) Accumulated negative amortization represents interest that will be earned in future periods but has been paid in the current period.
(d) Both (a) and (b) are correct.