Financial Statements Mispresentation: Do your numbers lie?

Kasus accounting irregularities terus berlanjut menjadi headlines berita, dengan kasus terbaru adalah Tesco PLC. Banyak orang terheran-heran dengan kasus-kasus tersebut dan bertanya bagaimana kasus tersebut
terjadi dan kenapa kasus tersebut tidak teridentifikasi sejak awal? Pelajaran dari kasus fraud yang melibatkan perusahaan publik terkenal, seperti Enron, WorldCom, dan Tesco PLC, dan ditambah lagi dengan pengetatan aturan dan pengawasan, telah mengurangi masalah bagi Perusahaan dalam menghadapi shareholder class actions, terkait dengan financial misreporting. Namun, data dalam 2 tahun terakhir menunjukan bahwa satu company per minggu masih menghadapi tuntutan karena penyimpangan akutansi (accounting irregularities) dan salah saji laporan keuangan (financial misstatement). Sebagaimana ditunjukan dalam tabel di bawah, rata-rata biaya settlement telah meningkat.

Financial Mispresentation

Financial Statements Mispresentation: Do your numbers lie?

Forensic accounting

Forensic accounting = disiplin khusus yang berhubungan dengan salah saji laporan keuangan (financial misstatement), dalam hal prevention dan detection dan, pastinya, recovery dan remedy. Forensic accounting means the investigation or analysis of accounting evidence relating to unusual transactions due to either error or fraud.
Forensic accountants umumnya digunakan dalam dua cara:

• to proactively investigate the control environment to identify weaknesses and areas susceptible to fraud or loss 
• to investigate a specific situation to ascertain the true financial position where:

1. a transaction may have occurred but the cause is unknown, such as an unexplained loss, inventory variance or some other anomaly
2. a transaction has been deliberately recorded to misstate the financial position.

Forensic accountants work closely with investigators in order to gather evidence to determine the facts of accounting transactions. These are often complex transactions, in an environment where there has been control breakdowns or weaknesses.

Studi Kasus: Inventory variance

A forensic accounting investigation of a product distributor’s accounting records for suspected misstatement of $40 million in inventory variances was undertaken. This included an analysis of suspense accounts to correct transactions, and to identify control weaknesses and control improvements to eliminate inventory variances. Causes of the material inventory variance were identified which included improper accounting for product bundling, inventory returns and invoicing. In addition various unclaimed supplier rebates were identified that were recovered by the product distributor.

High risk areas for misstatement

The PricewaterhouseCoopers Securities Litigation Study 2004 into US class actions revealed the primary reasons for misstatement of financial accounts, due to error or accounting irregularity, are:

• Revenue recognition: Two thirds of class actions arise from accounting issues associated with revenue recognition issues such as: incomplete delivery of product; holding sales accounts open into the new year; billing customers but failing to complete delivery; over supplying customers to achieve sales with uncommercial rights of return offered through side letters; fictitious journal entries; backdating contracts; or falsifying documents and related party transactions.
• Expense understatement: for the first time in 2006 understatement of expenses was the highest cause of financial misstatement. Issues arose with respect to capitalisation of expenses, under provisioning of impaired assets, improper accounting for expenses associated with construction and in-progress assets.
• Asset overstatement: Issues often relate to estimates as to the adequacy of the provision for doubtful debts or uncollectable receivables; adequacy of warranty reserves or claim reserves; write-downs of assets; or adequacy of provisions for inventory obsolescence.
• Understatement of liabilities or asset impairment: Many cases relate to failure to record probable contingent liabilities and assets where the value and its impairment are difficult to estimate.
• Inventory variances: Sophisticated automated fraud detection programs should be used to analyse  transactions, in order to identify unaccounted for inventory movements caused by bundling, receipting or invoicing errors. Diagnostics of inventory loss by type, territory, and timing to identify possible misappropriation or cause of loss should also be undertaken.
• Improper disclosure of transactions especially in relation to contingent liabilities, guarantees and other company commitments.

Studi Kasus: Misappropriation by financial controller 

The financial controller of a large organisation was alleged to have misappropriated $5.5 million from the organisation through cheque fraud. An investigation was conducted to determine the extent to which amounts might have been misappropriated and to trace those funds to identify possible sources of recovery.

In addition, as a result of an attempt to disguise the misappropriation, various accounts had been misstated and liabilities had not been recognised. A full reconciliation of all accounts was conducted to determine the organisation’s true financial position.
The misappropriated amounts were fully recovered from the perpetrator’s assets, from a fidelity bond insurance claim, and a claim against the auditors for professional negligence. Accounts were reconciled identifying misstatement of assets and liabilities totalling $8 million and various controls were implemented to reduce the risk of future misstatement.

Studi Kasus: Falsified schedule of value annexed to sales contract

A computer systems development company misstated its financial statements when one of its managing directors created a false schedule annexed to the sales contract where the contract amount was changed from $13 million to $20 million. The audit verified that the progress payments were receivable but did not verify the contract amount.

Red flags

A cry of disbelief is often heard when a financial misstatement occurs but often the same old red fl ags appear, including:

• inadequate or non-transparent explanations for unusual transactions, variances or results
• large adjustments made after period end. A comparison of the latest management accounts to year end accounts will help identify unusual variances such as increases in revenue or decreases in expenses. 
• complex transactions that are not auditable, i.e. there is an absence of underlying documentation supporting the transaction 
• creation of fictitious reconciling items to create the appearance that accounts are in balance, when they are not 
• existence of concealment of documents, such as, ‘side-letters’ and other extracontractual arrangements 
• discovery of falsification of documents, dates (for example, backdating), contractual terms, or other business records 
• significant related party transactions.

A fraud culture?

It is not just poor processes that result in internal control weaknesses, but also nonfinancial cultural factors (internal and external) which give rise to a higher risk of accounting irregularity. Such factors include:

• management’s operating and financial decisions being dominated by a single person or small group of people
• unduly aggressive attitude by management towards financial accounting and reporting, especially market earnings forecasts
• lack of supervision and controls over decentralised parts of the organisation, such as overseas subsidiaries or regional offices
• rapid rate of change in the industry due to technological, competitive and other market factors, creating pressure to misstate the true financial position and/or enabling concealment of transactions in an unknown emerging environment
• failure of management to adequately address known internal control weaknesses; for example failure to implement recommendations of external auditors in management letters 
• significant connection between earnings performance and management compensation such as bonuses or the contentious issue of options.

Simple strategies to mitigate risk

Organisations that experience problems with accounting policies can mitigate risk if they adopt and consistently demonstrate good corporate governance practices, as set out below:

Audit

• Internal Auditors who work independently of management and are potentially supplemented by an external independent adviser
• a special independent review of high risk areas such as revenue recognition 
• accurate and informative reporting from management, for example forecasts that include detailed assumptions, actual results compared to those assumptions and any variations to forecasts explained.

Transparency

• the existence of an audit committee that meets regularly, invests sufficient time and resources, and is actively involved in reviewing key accounting policies
• transparency of material transactions through disclosure in the notes to the accounts, as required by International Financial Reporting Standards 
• preparation of detailed and timely management accounts 
• sign-off by senior accounting personnel that certain internal controls are being satisfied, such as reconciliation of key accounts including bank accounts and debtors.

Tone at the top

• It is often heard that the Chief Executive Officer directed that, no matter what, the company must reach certain numbers, such as earnings per share or Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). Staff have interpreted this as an instruction to post fictitious journal entries to revenue or otherwise infl ate revenue.
• Organisations that focus too much on one key performance indicator may tend to forget about others. For example, driving sales may help gross sales but this may be at the expense of the margin or quality of the debtors.

Studi Kasus: Bill and hold

A manufacturer felt pressure to achieve year-end sales forecasts and the sales force were asked to come up with strategies to meet targets. One option taken was to ‘bill and hold’, where customers entered into a sale agreement for goods to be purchased but the product was sent to the manufacturer’s own warehouse. Since responsibility for the goods was not passed to the customers there was no effective delivery.
The second option was to offer deep discounts to customers to purchase goods with a ‘side letter’ of guaranteed return, effectively creating a consignment, not sale. These transactions were identified through a review of the manufacturer’s stocktake and unusual sales returns just after year end.
The manufacturer was forced to re-state its financial statements, the share price fell dramatically and the manufacturer and its senior officers faced regulatory action.

Culture

• The existence of a strong culture which fosters a two way communication of issues between leaders and staff. Where leaders express a reluctance to hear bad news, there is the possibility that staff will delay communicating problems until it is too late or the problem has become worse.

Forensic accounting process

Forensic accountants typically follow a standard process to gather evidence to identify financial misstatement, quantify any loss and determine options for recovery. This process includes:

• walkthrough/reviewing the purchase and sale cycles to observe and test controls to identify their effectiveness, including identifying non compliance and methods for circumventing controls. Using an investigative mindset to challenge the control and experience of how past frauds have been committed, the forensic accountant often has a unique insight into where fraud risks might exist within these cycles
• reviewing and collating documents and electronic evidence related to the transaction
• interviewing staff to discuss fraud risk and instances of loss
• preparing a report which quantifies any loss and provides an explanation of the cause 
• identifying opportunities for the recovery of that loss 
• recommending control improvement to reduce the risk of future loss.

Company directors, especially Chief Executive Officers and Chief Financial Officers, are subject to increasing risk exposure, including personal liability for the actions and financial reporting of their companies. Yet how do you know whether the information you receive is sufficiently accurate, reliable, complete, relevant and timely to satisfy your duties and responsibilities as a company director? Important information you need to receive and review:

• liquidity reviews, including disclosure of cash balances and disclosure of restrictions on the use of cash and loan covenant compliance
• analysis of trade debtors, including a review of assumptions used to calculate provision for doubtful debts, collection trends and efforts to improve collections
• analysis of creditors, including analysis of aging and disclosure of creditors in dispute 
• analysis of inventory, including a review of assumptions as to the adequacy of provision for inventory obsolescence 
• analysis of earnings, including obtaining from management disclosures and analysis of the underlying assumptions and estimates in the preparation of management accounts 
• analysis of forecasts for earnings and cash flow, including:

1. disclosure of underlying assumptions and changes in forecasts
2. comparison of forecast to actual results with explanation as to the nature of any variance
3. analysis of changes in underlying forecast assumptions

• other industry or company-specific reviews.

Sumber: Fraud: A Guide to Its Prevention, Detection, and Investigation, PwC Australia.
For more information, please visit www.pwc.com/au/forensicservices