Fraud Case

The article is about a forensic accounting examination of financial reporting fraud at the segment level. The aim of the authors study is to assess a variety of segment financial reporting frauds that have been an overlooked topic in both practice and academia. The other purpose is to increase the transparency and provide more insight of the overall financial reporting. The study illustrates the firm characteristics, types of fraudulent and some of the financial effects the fraud had on the nine major corporations. It leads to the issuance Accounting and Auditing Enforcement Release (AAER) that specifically referenced fraud at the segment level to describe the type of segment fraudulent transactions, fines and penalties imposed on corporations and management according to the investigation of Securities Exchange and Commission (SEC).

The method used to concern over the quality of segment reporting is Statement of Financial Accounting Standard (SFAS) No. 14. The segment information is important to the company to manage and organize the business. However, it was argued that the shortcoming of SFAS No.14 as it is too indistinguishable and easy to circumvent. Disaggregate information is completely necessary to estimate the future cash flows of the business. Relative profitability information of different division and productions is needed by investors to make a basic forecast. Segment data is important in providing information about opportunities and risks related to a company’s diverse operations. Hence, users are able to project earnings or cash flows more effectively on a segment by segment basis than for the company as a whole.

Compared to SFAS No.14 segment reporting method, a new model SFAS No.131 ‘management approach’ was introduced. The new approach focuses on the way the chief operating decision makers organizes segments within a company for making operating decisions and assessing business performance. The function of SFAS No.131 is to improving their ability to forecast the business future cash flows, usage of internal reports, comparability, the opinion of the competitive harm, aggregate criteria application and the business development comparative figure from year to year.

However, inconsistent compliance among reporting companies under SFAS No.131 leads to the segment information is difficult for outsiders to observe and monitor. Much of the existing research provides little insight into managerial decisions that result in intentional fraud at the segment level. It is hard to determine the true extent of segment financial fraud occurring within firms as there are difficulties to recognize all firms that have committed fraud at the segment level. Fraudulent segment financial reporting is known as accounting irregularities and also defined as deliberate misstatements and omission of amounts or disclosure in financial statements to misleading the financial reporting users.

Out of the 44 firms,