Financial Statement Fraud

Financial Statement Fraud Schemes

Financial statement fraud is considered to be a deliberate “misrepresentation, misstatement or omission of financial statement data for the purpose of misleading the reader and creating a false impression of an organization’s financial strength” (Bradford & Media, 2013). Financial statement fraud is committed by both private and public companies to secure bank approvals for financing, increase investor interests, or merely as a justification for increased salaries and bonuses. Financial statement fraud potentially can put a company out of business and can have lasting effects on the business employee’s and investors.

After careful evaluation of the Apollo Shoes case there are a few areas of concern regarding potential financial statement fraud schemes. Potential fraud schemes to be aware of are improper asset valuations concerning both inventory and accounts receivable.

Improper asset valuation “exaggerates a company’s assets and portrays the assets in a more positive financial light” (Pollack, 2012). Improper asset valuations can involve improper values of inventory, fixed assets, or accounts receivable.

Inventory has economic value to a company and is considered an asset. Accordingly, inventory must be maintained in a manner so that it is not subject to pilferage, loss, or thefts (Management Study Guide, 2013). Year-end physical counts and cycle counts are both methods that companies may use to control inventory levels. Any differences between on-hand quantities and physical counts or cycle counts must result in an adjustment to the cost of goods sold.

The reserve for inventory obsolescence for Apollo Shoes is a significant amount because of the inventory level of men’s size 23 shoes (Louwers & Reynolds, 2007). However, as noted in the Apollo Shoes case, the reserve for inventory obsolescence decreased significantly last year. Unfortunately, as noted in a customer verification of accounts receivable...