Financial Statement Fraud Schemes

Apollo Shoes, Inc. is a leading company that distributes foot wear products that are relevant to the athletes and the general population across the globe. The main brands for the company includes Speaker shoe, Spotlight, and Siren, which are currently used by various athletes in the society (Louwers & Reynolds, 2009). Apollo Shoes Inc. distributes its products to both small and large retail outlets across the globe. With the current state in the economy and the recent scandals on organizations, fraud is a top concern in many corporate organizations. The regulations provided in Sarbanes-Oxley provide strategies for preventing and detecting frauds in corporate world, and they have exposed numerous fraudulent activities that may have been undetected in the society. The analysis aims at providing financial statement fraud schemes and the types of evidence as provided in Apollo Shoes Casebook.

Financial Statement Fraud Schemes and Relevant Evidence

Not a single organization is immune to fraudulent activities, and Apollo is no exception. It is incumbent for managers to acquaint themselves with schemes and red flags that will denote any fraudulent activities that may befall the organization. The first financial statement fraud activity is overstating revenues. Indeed improper recognition or overstating of revenues is the most common fraudulent activity. In this case, the financial expert records revenue in its gross value rather than net value. From the information provided on Apollo Shoe Company, the high sales value for unaudited financial statement ($245,213,452.88) could be attributed to overstated revenues. Some of the schemes the organization may have used include recording sales of commodities that are out on consignment, recording future sales, or recording sales revenues that were not undertaken. In order to ascertain whether the fraudulent schemes were undertaken, the auditing team should analyze whether the revenues increased without an increase in Apollo’s Inc. cash flow. The other red flag include tremendous increase in revenue outlay as compared to other organization in the same industry.

Secondly, financial statement’s fraudulent activity evident in Apollo Shoes Company is the understatement of expenses. The Company’s unaudited expense is $183,629,992.26, which is much lower than the audited expenses of about $236,407,993.58. (Louwers & Reynolds, 2009). When expenses are understated, the information that is provided would not be the true and fair view of the company’s financial position, as the net income would have been increased. The financial schemes for this fraudulent activity include reporting the cost of sales as non-operating expense so that it does not have a negative effect on gross margin. Apollo Company’s accountant may have ignored recording of some expenses that accrued in that financial period, as such understating the value of the expenses. Some of the red flags that denote this scenario include unusual increase in the value of income as compared to other rival companies, warranty claims and sales returns allowances are shrinking in percentage as compared to other companies in the same industry, and increase in the value of fixed assets.

The third aspect that the company needs to put into consideration is the improper asset valuations. The company’s strategy to write-down asset is not clear and reliable. The schemes that the company’s management has undertaken include manipulating the asset reserve, changing the live of asset in order to increase its usefulness, failing to write-down the value of the asset when its salvage value has diminished, and manipulating the assets’ fair market value in order to increase the company’s financial position. In order to ascertain the vulnerability of these schemes, the auditor analyzes the negative cash flows that continue to recur in the company’s operations. Some of the values of liabilities, revenues, expenses, and assets are subjected to uncertainties and judgments that can be difficult to substantiate. The estimates of current year financial statements has not been accordance to the regulations of Auditing Standards, especially SAS 99, which purports that the consideration on individuals’ item estimates and consideration of all other statements should be uniform. This will necessitate a coherent comparison with other rival companies in the industry in order to ascertain the company’s financial position and competitiveness in the economy.

Smoothing of earnings is also a financial statement fraud. In this case, the liabilities are overestimated when the company is performing well and when the revenues for Apollo Inc. decline the management understate the value of the liabilities. This will make the investors believe that the company is stable, and it is not affected by the economic challenges facing the organization. In addition, some of the information provided may be improperly disclosed especially information that involves third party transactions and management of loans. Transactions that are complex are not immune to fraudulent activities. For instance, transactions incorporating special-purpose entities, structured finance, unusual counterparts, and off balance sheet activities. In these scenarios, the evidence can be achieved through analysis of significant transactions that are related to the third party, rationalizing multiple memos that involve aggressive accounting treatment, and domineering management.

In the case of concealed liabilities, expenses are reclassified as either prepaid assets or shifting expenses to a quite different entity. The evidence provided by the auditor on potential of fraudulent financial activities purports that Apollo Inc. had not reported any income in prior years and had reported a high income of $3,782,854.04 in 2011. However, the company had not yet paid dividends to its investors. Consequently, the recent purchase of Synergizer Battery stock was a scam. From the records provided, the broker confirmed a canceled check, and when it was compared with the available shares, there was no change in the purchase value of $23.63 (Louwers & Reynolds, 2009). Therefore, there were no sufficient funds to have purchased even 5% of Synergizer’s stock.

The Company’s investment income incorporates equity earnings in the Shock-Proof Socks and the transfer of $480,375.80 from the account of Controller Clearing. The information provided showed that the clearing account is a temporary account that Apollo uses in the case of off balance sheet items and financial transactions that the organization cannot identify. As such, where there is a balance in the end year transactions, the miscellaneous expense or income recognized should be clear out. The amount is the same amount as the investment made in Synergizer, and, thus, the amount that was provided in the financial statements raises concerns on its reliability and accuracy. Apart from the Synergizer issue, the organizations have reported some amount for checks that were cancelled, and they have included in the end year financial statements. There is need to perform bank and cash reconciliation in order to ascertain the vulnerability of these discrepancies in Apollo’s financial statement. Finally, the depreciation values for the company have been understated due to the frequent changes in the mode of valuation.

References

Louwers, T. & Reynolds, K. (2009). Apollo Shoes, Inc .London: McGraw-Hill.