How do Companies Commit Fraud?

     With all the accounting gimmicks and fraud that goes on, and goes on unnoticed, what are some

of the ways companies implement accounting gimmicks and how can investors notice them? The

CFRA has identified thirty techniques, grouped in seven categories, most companies use to commit

accounting fraud.

     The first gimmick used is recording revenue too soon or recording revenue that is not accurate.

This includes tricks such as recording revenue before a future service is met; recording revenue before

a customer's shipment takes place; recording revenue even when a customer does not have to pay. It

also includes selling to an affiliated party, grossing up revenue, or giving a customer something as a

quid pro quo. Another gimmick used is recording fabricated revenue. This includes recording

investment income as revenue; recording sales that have no real impact; recording cash as revenue in a

lending transaction, and releasing revenue that was held back because of a merger. The third gimmick

used is increasing income with one-time gains. This would be including investment income as

revenue, increasing profits by selling assets that are undervalued, and even creating income on the

balance sheet accounts. The fourth gimmick is moving expenses to a later or earlier period. This

technique involves capitalizing normal costs instead of expensing them; switching accounting policies

and moving expenses to an earlier period; the amortization of costs too slow; not writing off damaged

assets; and reducing asset reserves. Another gimmick used is not recording or improperly reducing

liabilities. This is the act of recording revenue too soon when services still remain; creating false

rebates; putting questionable reserves into income; reducing liabilities by changing assumptions, and

not recording expenses and related liabilities with services still remaining. The sixth accounting

gimmick used is moving current revenue to a later period. This technique includes holding on to

revenue before an acquisition, and creating and releasing reserves into a later period. The seventh and

final gimmick according to the CFRA is moving future expenses to the current period as a special

charge. This includes writing off R and D costs in an acquisition; improperly inflating an amount in a

special charge, and accelerating discretionary expenses to the current period.

     Investors looking to buy stock in a company should look out for several things before investing

in a fraudulent company. Some main things for investors to watch out for, include; looking for

management incentives that might increase distorted outcomes, to a company capitalizing costs instead

of expensing them, to a company investing in worthless assets. There are many other small clues

investors can look out for in a company's financial statements, but the main thing investors need to

remember is always check a company's financial statements thoroughly before investing and not

relying on every statement being audited.