Revenue Recognition Changes Caused Fraud

Revenue recognition accounting standard ensures the correct revenue is recorded for each period of the income statement, it was previously based on the realization principle - requires revenue to be recognized when the earning process is virtually complete and is certain to collectability. FASB & IASB developed a new revenue recognition standard, Revenue from Contracts with Customers,” on May 28, 2014, ASU No 2014-09. (RRPA Revenue Recognition and Profitability Analysis-1-LO1-5).

Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay

* U.S. governmental oversight of accounting fraud and abuse and its effect on the company Potential corruption schemes to be aware of in the company

The issue of revenue recognition practices is an area that has received a lot of attention from regulators. Whenever there is a report of financial restatements or negative earnings, regulators pay extra attention to review the financial statements in order to verify that that there are not any indications of financial fraud or that the organization overstepped their boundaries in the area of managed earnings. The reason that regulators have taken a special interest in financial accounting and potential fraud is due to the collapses of companies such as Enron, WorldCom and Tyco. Regulators and those in the accounting profession are focusing their efforts on the causes of fraud as well as the steps that can be taken to effectively detect

In conclusion, because SAB 101 was released in order to curtail specific abuses, it should not be seen as a comprehensive treatise on the entire area of revenue recognition. The vast majority of companies apply the revenue recognition criteria in a very straightforward way with no questions from their internal/external auditors, from the SEC, or from investors. Thus, the revenue recognition issues covered in SAB 101 may not be comprehensive, but they are extremely important. The new revenue recognition will impact all public companies but mostly the industries such as telecommunications, software, engineering, construction and real estate. Modifications to how revenue is recognized are the way revenue is allocated, the time of revenue recognition,

The following research paper is about the new joint revenue recognition principles that were unveiled by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which standardizes generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) on recognition of revenue in the United States. The new joint revenue recognition principle was created to increase the financial transparency and the comparability within the industries in the United States of America, and as well as the industries throughout the world. The companies in the United States currently use the GAAP standards and the rest of the world uses the IFRS. But each country

From the beginning, the process of releasing the new SAB 101 that regulate Revenue Recognition was controversial. Revenue recognition differs between Generally Accepted Accounting Principles (GAAP) which is the method the United State (US) is using and International Financial Reporting Standards (IFRS) which is the method the rest of the world is using. Under GAAP, it is detailed and has specific requirements for revenue recognition transaction base on individual industries. Therefore, different industries use different accounting method for similar revenue recognition transactions which can be difficult to compare financial statements between different industries. The reason is revenue is one of the most important measures presents to the investors in order to assess a company’s performance and prospects. On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued new guidance on revenue recognition to improve and establish more

Revenue recognition is currently one of the most complex areas of accounting, however it hasn’t always been this way. From relatively simple beginnings, the guidance for recognizing revenue has grown larger and more complex along with the business environment. One reason revenue recognition has needed frequent improvement is its vulnerability to fraud. It has been recorded that several frauds during the 1987-2007 time period were a result of an overstatements of revenue, typically at the end of an accounting period in an effort to boost earnings. This fact shows the importance of rigorous revenue recognition guidelines, while further demonstrating a need for the revenue recognition project. There was also a need to clarify the differences in

Current standards for revenue recognition are set forth under Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (which were codified in Subtopic 605-10,

The author of this report is asked to present a report that covers a real corporate fraud and how to help prevent it through techniques and metrics. The author is asked to present five major answers. The first answer is to how to implement the investigation and thus help fetter out who is the culprit and how deep and wide the fraud goes. The second question asks the author to detail what types of surveillance and review will be undertaken including techniques that are covert and unknown to the people being watched up to and including the highest executives of the firm. Red flags that would arise suspicions are to be identified as well as key practices to be used interviews with people with potential knowledge or even involvement in such crimes. In conclusion, a fraud prevention plan will be articulated.

The SEC sought to fill the gap in the literature with SAB No.101, and the staff’s view that the basic criteria for revenue recognition were realized or realizable and earned. Underlying principles in SAB 101 is revenue recognition. Revenue is recognized when it is realized or realizable and earned as demonstrated when 4 criteria are all met: Persuasive evidence of arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. These criteria are in many cases stricter than the practices certain industries have followed for years and their adoption has led to some high-profile earnings restatements. However, under SAB 101 form, in some respects, trumps substance and seemingly insignificant contract provisions can defer revenues. Also, SAB 101 addressed issue about income statement presentation and disclosure, because revenue recognition generally involves some level of judgment, the staff believes that a registrant should always disclose its revenue recognition policy.

Revenue recognition is a primary cause of financial statement restatements, are related to fraudulent behavior, cause market value and capitalization drops, and cause higher enforcement efforts to ensure fairness and integrity in financial statements (Kieso, Weygandt, & Warfield, 2008). Most fraud cases that involve company executives involve revenue recognition is some manner, whether to steal company money and hide the actions or in efforts to meet financial analysts expectations to maintain stock prices and still maintain job positions and bonuses. Each case has led to material misstatements where financial statements had to be restated with SEC, caused market and capitalization drops for the companies, and caused higher enforcement efforts by SEC. And, each case has effected financial statement users and has caused uncertainties in minds of investors, which compromise the companies. When

The International Accounting Standards Board (IASB) and The Financial Accounting Standards Board (FASB) have undertaken a joint revenue recognition project that clarifies the principles for recognizing revenue that can be applied consistently across various transactions, industries, and capital markets. This project will apply to all contracts with customers except leases, financial instruments and insurance contracts. The joint project will attempt to remove inconsistencies and weaknesses in existing revenue recognition standards by retrofitting, and thoroughly improving the recognition framework. The project provides a single revenue recognition model to improve comparability over a range of firms

premature determination of revenue are by far the most common fraud against the corporation (p.4)

Financial statement fraud is any intentional or grossly negligent violation of generally accounting principles (GAAP) that is undisclosed and materially effects any financial statement. Fraud can take many forms, including hiding both bad and god news. Research shows that financial statement fraud us relatively more likely to occur in companies with assets of less than $100 million, with earnings problems, and with loose governance structures (Hopwood, Leiner, & Young, 2011).