Principles of Accounting SLP - Essay Example

Running Head: ABBREVIATED OF YOUR CHOICE (all caps) and Section # of Question #1The global world lost $2.9 trillion in the corporate fraud in the last fiscal year. In the year 2008, the United States lost $994 billion in 2008. The most common type of fraud was corruption and check tampering. Prevention of the fraud at the corporate level is one of the main responsibilities of the managers, controllers and CFO. But with the increasing losses from the financial fraudulent activities, I believe that the ethical training of employees will be an effective mean to reduce fraudulent activities.

The strong ethical culture will force the employees into compliance with the regulations. At the same time, the consistent communication will enlighten the employees on their effect of choices on the company’s future and on their future. Question # 2Opportunities for misstatement and fraud exist upon every line item on balance sheet and income statement. Therefore, the finance managers should able to identify the ‘red flags’ and ask the right kind of questions. (Mabry, 2007) The two components of a balance sheet and/or income statement can be used as a “red flag” to alert of potential fraudulent activity areOverstating RevenuesThe corporate can use several schemes to overstate their revenue earnings during a certain period.

Record gross revenue instead of the net revenueRecord future sales in the current periodRecord sales that did not materialize or even existThere are certain red flags that can be used to identify the potential fraud in this item Huge rise in revenues without any rise in cash flows or account receivables.Complex and unusual transactions near the end of the accounting periodShowing very strong sales when the competitors are have weak or falling salesImproper Asset ValuationsThe corporate can use several schemes to overstate their assets at a certain period of time.

Altering the useful lives of the assets Manipulating the fair market values to their advantageInfluencing reserves to their advantageThere are certain red flags that can be used to identify the potential fraud in this item Reporting earnings growth while having negative operating cash flowReporting earnings when the economy and consumer demand are in a slump Question # 3An in-depth analysis of the ratios of the financial statements can be used to detect the fraudulent activities of the company.

A change in ratio over a period of time or over one year should be rational and logical that can be explained properly. Any unusual ratio jump or fluctuations or extreme deviations from the industry average that cannot be explained rationally need to be investigated. This is how the analysis of ratios can be used as a method of fraud detection. (Harrington, 2005)Gross Margin Index is one example of the fraud analysis ratio to analyze the financial statement over a period of time. (Harrington, 2005)Gross Margin Index = {(sales prior year minus cost of goods sold prior year)/sales prior year} / {(sales current year minus cost of goods sold current year)/sales current year}Manipulators sported GMIs of 1.

193 at the mean and 1.036 at the median. The analysis of the Enron shows that it had a GMI of 1.448 which means that it was a high manipulator in overstating its revenues. ReferencesMadura, J. (2003). What every investor needs to know about accounting fraud. Mcgraw-Hill. Mabry, B. and Toivonen, S. (2007) "Detecting Financial Statement Fraud: What Every Corporate Manager Needs to Know - Oil & Gas Financial Journal." Oil & Gas Financial Journal- Coverage of Oil and Gas Markets, Companies and Stocks.. Web. 26 Mar. 2011. .Harrington, C. (2005) "Association of Certified Fraud Examiners.

" Association of Certified Fraud Examiners - Fraud Training & Education. Web. 26 Mar. 2011. .