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EXETER

THE FINANCIAL FRAUD


Description
Exeter is a real estate firm based at gulf coast
who faced an annual net loss.
Hank snow, owner of the company is facing
intense pressure from the creditors for the
profit.
Alice li (controller) has taken a loan of $10000
to beat the daily operating cost.
Hank convince Alice to transfer the loan into
incoming revenue.
This would help Exeter to portray positive
financial number for the current fiscal year.
Hank had a perspective to correct the
fraudulent revenue in January.
CONCEPT
Alteration of accounting records regarding sales, revenues, expenses.
Profit motive such as inflating company stock values, obtaining more
favourable financing
OPPORTUNITY relates to access to assets or the ability within an
organization to manipulate financial documents or records to cause
financial statements to be misrepresented and to cover up any wrong-
doings.
RATIONALIZATION is the thought process that a person goes through to
convince themselves that what they have done is acceptable.
Pressure from other parties.
FRAUD RISK MANAGEMENT LEVELS
Organizations should be prepared to address fraud risks at all three
levels:
FRAUD DETERRENCE AND PREVENTION
- Prevention -based internal controls and behaviours will help
mitigate the risk of opportunity for employees to commit fraud
- Effective screening (and re-screening) of employees
- Management fraud awareness and skills training
CONCEPT
EARLY FRAUD DETECTION
Detection based internal controls and behaviour's
Clear statement of management detection responsibilities and accountability
Detection skills training for managers at all levels and certain key control focused employees
Hotlines Other tip sources Monitoring for red flags and other fraud indicators Clear action
upon suspicion
EFFECTIVE FRAUD HANDLING
Response mechanism (what happens when the alarm sounds)
Investigation
Loss recovery
TOP REASONS INTERNAL CONTROLS BREAK DOWN
Blind trust of employees
Ignoring control implications of policies, procedures, and reports
Ignoring behavioural indicators of problems
Situational incompetence
Accounting Frauds
Toshiba Corporation
Established back in 1875 and recently ranked
No. 2 in terms of revenues among the electronic
companies in Japan,That is, until the scale and
scope of the recent scandal was finally
revealed.
Toshiba had been inflating its profits by at least
$1.2 billion from 2008 to the present across all
divisions of the conglomerate.
The investigators report said the consumer
electronics and engineering giant had
overstated operating profits by a total of 151.8
billion yen ($1.22 billion) since 2008, claiming
numbers that were up to three times the actual
level.
Worldcom Scadndal
Inflated assets by as much as $11 biliion,
leading to 30,000 lost jobs and $180 billion in
losses for investors
Analysis
Exeter being a reputative building contractor in the Gulf
coast faced the first annual loss of the year.
intensive pressure from the creditors and on-stake
goodwill of the company made Hank to take rational
decision in favour of the company.
Hank had a motive to maintain investors faith and
companys reputation.
According to Hank, If he would have not taken the
decision of manipulating financial statement then he
might have lost creditors for the company.
Hank assumed that manipulated financial statement can
bring more credits from creditors and can help in
maintaining companys reputation.
Hank also assumed that company would be able to
correct the entries in January as the loan amount is paid
off.
Conclusion
Fraud Prevention
There is complete breach of SarbanesOxley Act02 by Exeter.
Exeter did not practise ethics of business.
The owner of the Exeter, Hank Snow, should had consulted experts from the
industry, i.e Legal advisors or solicitors.
There was lack of transparency & corporate disclosure accountability of
Exeters financials to creditors.
Auditors played a major role in igniting the fraud. Alice, the controller, should
have questioned Hank about his idea.
Fraud risk management like training & development werent in place.
Post Fraud
Reviewing your companys internal controls, policies and procedures is first
and foremost.
Investigate to avoid later similar issue.
Good leadership helps to lead the team and avoid such thinking #Goodminds.
Identity, Quantify and trace losses at higher management.
How would this action affect the year end
income statement ? How would it affect
year balance sheet ?
For Year End Income Statement
Unexplained revenue or sales increase without a corresponding increase in cash
flow.
Artificial projection of current false revenue will increase overall income & portray
wrong analysis to stakeholders.
A sudden unexplained increase in revenue without a corresponding increase in
expected expenses & vice-versa.
For Balance sheet
An unexplained incline in the business while the rest of the industry is under
performing during that period.
Creation of fictitious Assets by way of converting bank loan (Liabilities) into Cash
(Assets) will increase Assets and reduce Liability.
Loan funding detracts the owner's equity in a company, because financing too
much can create problems with cash flow
If you were one of the companys creditors,
how would this fraudulent action affect you?

The loan repayment by Exeter wouldnt be possible and result into bad
debts in my books of accounting.
Misrepresentation of loss as profit will help Exeter sanction loan easily.
As a creditor there will loss of Interest as well principal amount.
Loss of opportunity in the market.
Might result into regulatory probe & surveillance.
Will affect goodwill & credibility of the creditor in the market.
Reduce liquidity of funds.
Incase of Debt syndication this might impose criminal action and penalty
by regulators.
Numerical P1 48B
ASSETS = Liability Qwners Equity
Account
Supplie
Cash Receivabl
s
e
20000 = 20000
Dec 1
20000+2200(ca
= 20000+2000
sh received)
Dec 2
22200 - 350
(paid for 350 = 22200
Dec 5 supplies)
4500
Dec 9 21850 350 = 22200+4500
( earning)
100 ( received
Dec 10 21850 4500 350 = invoice for 26700-100
utility)
Numerical P1 48B
Account
Cash Receiva Supplies Liabilities Owners Equity
ble
21850 - 475
Dec 15 4500 350 = 100 26600-475
( Expense)
21375 100
Dec 20 ( paid 4500 350 = 0 26125
liabilities)
Dec 25
21275+4500( r
0 350 = 0 26125
eceived cash)
Dec 28 25775 -
3000(rent
26125- 3000-
expense) 0 350 = 0
Dec 30 1500
1500 ( wages
expense)
Dec 31 21275+
2000( Received 0 350 = 0 21625+2000
Final cash)
Cash
23275 3500 23625-
TEAM MEMBERS

Nikhil Choudhary
Pooja Singhi
Prayrit Arora
Shashank Varma
Shivang Sah
Smitesh Shah