Accounting Fraud Case Study

The primary methods of accounting fraud

In the current stock market, many of the listed companies often adjust the accounting policies, affiliate transactions, asset replacement and other means of reorganization of book assets in order to achieve the purpose of faking the performance of the company so that they can achieve some purposes of allotment, issuance of stock, etc., and those frauds have a negative impact on the development of the securities market. In order to achieve their different purposes, those companies inflate profits through accounting methods, to sum up, they often use the following means to achieve the purpose of manipulating profits:

1. Expenses treated as assets

When expenses occur, they should be recorded immediately

Extend the depreciation period, change the accelerated depreciation method to the straight-line method, and even do not record the depreciation. Those can "help" the company make profits, probably turn a loss into a profit.

3. Improper selection of revenue, expense recognition method

Advance or delay recognition of revenue or expense that is also widely used method for the listed companies to manipulate profits. In the case of Toshiba, Carpenter (2015) said that “Investigators found evidence of booking future profits early, pushing back losses, pushing back charges and other similar techniques that resulted in overstated profits.”

4. Affiliate transactions

Through intra-entity intra-entity asset transactions by affiliated parties, sell or buy products at unacceptably high price or low price in order to adjust the income or expenses for one particular party.

The impact of accounting fraud

Accounting fraud is great harmfulness. In recent years, more frequent frauds occur in accounting. In order to succeed in hiding the frauds, methods to fraud become more complicated. It is hard to detect such cases by auditors so that ordinary people are more unskilled to figure out the fraud, investors thus are highly likely to suffer in investments in those companies and lose their confidence

Improve the accounting legislation

1. Establish a sound system of civil compensation

The one who is charge of the company should be required mandatorily to do the "personal written certification" for the accounting information the company issues. And the responsibility of accounting information should be concretely implemented to the individual. In law, this embodiment of the legal system could provide evidences of "a civil action for damages" for the majority of investors, then mobilize the enthusiasm of prosecution by beneficiary concerned and enhance deterrence against counterfeiters.

2. Increase penalties for accounting fraud

The United States has made a series of severe penalties for the accounting fraud. For example, if the senior management in the company is suspected of accounting fraud, he will be sentenced to a maximum fine of $ 5,000,000, or 20 years in prison. However, the degree to penalties in China is far less than the US in the relevant accounting regulations for accounting fraud. Therefore, China should establish a strict system of financial penalties for the senior managers in the listed companies, and increase the criminal penalties for the individual staff who do the accounting fraud, which could give counterfeiters the punishment they