ITS 4450 - Fraud Risk Assessment Tools and Investigation


Chapter 13, Liability, Asset, and Inadequate Disclosure Frauds

This lesson presents material from chapter 13. Objectives important to this lesson:

  1. Understatement of liabilites
  2. Overstatement of assets
  3. Inadequate disclosure
Concepts:
Chapter 13

This chapter begins with a particularly boring account of false financial statements filed by a garbage company. The author was evidently so bored by it that he began the chapter again with an even more boring story. Oh...my...God. This is a thirty page chapter that the author summarizes in six paragraphs. Let's start there.

A liability is something that your company owes. Understating liabilities makes the company look more profitable than it is. Liabilities can come due in the future or the present, and failure to report them is a kind of fraud. You can even accrue liabilities from the past by merging with another company that has not paid off its debts. Page 463 presents a list of possible kinds of liability fraud, and the financial ratios and line items that should be examined for each of them.

The text discussed misreporting assets in another chapter. The effect on the books is the same in this chapter: show more value and the company looks more prosperous. A chart about asset fraud appears on page 472. It is not as helpful as the one about liability fraud, mainly because there are so many kinds of assets and ways to misrepresent them.

The third topic in the chapter is fraud based on inadequate disclosure. The first example meets that definition, but it is so much more. The company in the story sold stock based on an invention they did not own and could not market. Inadequate disclosure? Yes, if you assume that the initial disclosure should have been that the company was represented by liars and flim-flam men. This portion of the chapter does not present a chart of fraud types and documents to check. In the case of inadequate disclosure, the risk is more general. It may be, as in the examples, that the entire story the company is telling is a lie.

Since we are talking about con men, once again, let's visit with Frank Abagnale for a few minutes, again.


And if that doesn't do it for you, watch a few episodes of Sneaky Pete on Amazon Prime. It's a good set of lessons on being a con man.

Assignments

  1. Continue the reading assignments for the course.
  2. Complete the assignments and class discussion made in this module.