Fraud

Fraud

Cut-off Fraud

Fraud involves purposeful attempts to deceive, not good-faith disagreements on accounting treatments. One of the five basic methods companies used to boost up their profits is fraud in timing, which is also called cut-off fraud. This is done by recognizing profits early and liabilities and expenses late. “According to GAAP, revenue is recognized when the earnings process is complete and the rights of ownership have passed from seller to buyer.”

There are three categories in revenue recognition fraud: 1) playing with time, 2) recording revenue when services are still due, 3) shipping merchandise before the sale is final. Playing with time is the most common way to commit revenue recognition fraud. It involves holding the books open past the end of the accounting period to accumulate more sales. For example, one such company actually set to stop there clock at the end of each quarter until targets sales are made. And all the sales would be counted as in the accounting period to boost up their sales. Another method for recognizing revenue early is booking the entire revenue amount when service is not completely rendered. Many companies ignore the percentage-of-completion contracts by taking the cash payments into income, fail to record offsetting accruals for services paid for in advance, and record refundable deposits as income. The last category is shipping merchandise before the sale is final. Consignment merchandise is counted as being sold. A few companies also shipped merchandise to private warehouse for storage and counted it as being sold.

If one person handle the same transaction from beginning to end, premature revenue recognition is easier to accomplish. The responsibilities of order entry, shipping, billing, accounts receivable detail and general ledge should be distributed among different employees. With several different employees handling the process, it’ll be more difficult to commit fraud.