Fair Value Accounting Fraud

Essential guidance on the new fair value rules for accounting managers, auditors, and fraud investigators

Fair Value accounting is emerging as the next prime opportunity for financial statement fraud. Explaining the many complex applications of fair value accounting in the preparation of financial statements, Fair Value Accounting Fraud offers timely guidance on an up-and-coming issue as U.S. and international accounting rules pertaining to the use of fair value accounting continue to change.

You'll find discussion of

• U.S. GAAP and IFRS rules on fair value accounting issues, highlighting the areas most vulnerable to fraud
• Explanations of 75 categories of fair value accounting fraud schemes
• Fraud risk checklist that you can put to immediate use
• Practical detection techniques useful for auditors, investigators and others who rely on financial statements
• Expert advice from Gerard Zack, CFE, CPA, author of Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection

Comparing US accounting standards to International Financial Reporting Standards-thereby making this book useful worldwide- Fair Value Accounting Fraud helps you understand the new rules and develop new auditing and investigative techniques to enable you to detect potential fraud.

Preface.

Acknowledgments.

PART I INTRODUCTION TO FAIR VALUE ACCOUNTING FRAUD.

CHAPTER 1 Overview of Financial Statement Fraud and Fair Value Accounting.

Introduction to Financial Reporting Fraud.

What Makes It Fraud?

Why Financial Reporting Fraud Is Perpetrated.

Using One Fraud to Hide Another.

CHAPTER 2 The Use of Fair Value in Financial Statements.

Historical Cost versus Fair Value.

Sources of Accounting Principles.

U.S. GAAP versus IFRS.

Fair Value Option Added for U.S. GAAP.

Fair Value Defined.

International Convergence.

Some Principles of Financial Statement Presentation.

Effective Dates of Accounting Standards.

Impact of Fraud on Financial Statements.

CHAPTER 3 Methods of Determining Fair Value.

Introduction.

Market Approach.

Income Approach.

Cost Approach.

Internal versus Externally Developed Valuations.

Inputs to Valuation Methods.

Fair Value Guidance under IFRS.

Availability of Market Evidence.

PART II ASSET-BASED SCHEMES.

CHAPTER 4 Investments in Debt and Publicly Traded Equity Securities.

Scope of Investments Covered.

Sources of U.S. GAAP and IFRS.

Classification and Treatment—U.S. GAAP.

Classification and Treatment—IFRS.

Reclassifications in General.

Reclassifications from the Held-to-Maturity Category.

Determination of Fair Value.

Active versus Inactive Markets.

Temporary versus Other-than-Temporary Impairments—U.S. GAAP.

Impairment Losses—IFRS.

Summary of Fraud Risks.

CHAPTER 5 Ownership Interests in Nonpublic Entities.

Sources of U.S. GAAP and IFRS.

Introduction.

Consolidated Financial Statements.

Jointly Controlled Entities versus Jointly Controlled Assets.

Equity Method Investments.

Proportionate Consolidation.

Fair Value Option.

CHAPTER 6 Loans and Receivables.

Sources of U.S. GAAP and IFRS.

Recognition and Measurement—U.S. GAAP.

Recognition and Measurement—IFRS.

CHAPTER 7 Intangible Assets and Goodwill.

Sources of U.S. GAAP and IFRS.

Asset versus Expense.

Web Site Costs.

Measurement.

Finite Life Intangible Assets.

Residual Value.

Indefinite Life Intangible Assets.

Impairment Losses.

Concluding Remarks.

CHAPTER 8 Business Combinations.

Sources of U.S. GAAP and IFRS.

Business Combination versus Asset Acquisition.

Accounting for Business Combinations.

Identification of Intangible Assets.

Business Combinations Achieved in Stages.

CHAPTER 9 Asset Impairments.

Sources of U.S. GAAP and IFRS.

Definition of an Impairment Loss.

When to Test for Impairment.

Indicators of Impairment of Assets.

Extent of Impairment Loss.

Reversal of Previous Impairment Losses.

CHAPTER 10 Property and Equipment (Including Investment Properties).

Sources of U.S. GAAP and IFRS.

Initial Recognition.

Measurement after Initial Recognition.

Investment Property.

Impairment Losses.

PART III LIABILITY-BASED SCHEMES.

CHAPTER 11 Debt Obligations.

Sources of U.S. GAAP and IFRS.

Measurement.

Fair Value Option.

Valuation of Debt.

CHAPTER 12 Deferred Revenue.

Sources of U.S. GAAP and IFRS.

Recognition—Customer Loyalty Programs.

Multiple Deliverable Arrangements.

CHAPTER 13 Asset Retirement Obligations.

Sources of U.S. GAAP and IFRS.

Recognition—U.S. GAAP.

Recognition—IFRS.

Can a Reliable Estimate Be Determined?

Measuring and Recording an Asset Retirement Obligation.

Summary—Comparison of U.S. GAAP and IFRS.

CHAPTER 14 Guarantees.

Sources of U.S. GAAP and IFRS.

Recognition—U.S. GAAP.

Measurement.

Recognition—IFRS.

PART IV OTHER FAIR VALUE ACCOUNTING FRAUD ISSUES.

CHAPTER 15 Derivatives and Hedging.

Sources of U.S. GAAP and IFRS.

Definitions and Treatment—U.S. GAAP.

Definitions and Treatment—IFRS.

Measurement.

Embedded Derivatives.

CHAPTER 16 Assets or Liabilities of Sponsors of Employee Benefit Plans.

Sources of U.S. GAAP and IFRS.

Recognition and Measurement—U.S. GAAP.

Recognition and Measurement—IFRS.

CHAPTER 17 Contingencies and Provisions.

Sources of U.S. GAAP and IFRS.

Recognition—U.S. GAAP.

Amount of Loss to Be Recognized.

Recognition—IFRS.

Measurement.

Comparison of U.S. GAAP and IFRS.

CHAPTER 18 Share-Based Transactions.

Sources of U.S. GAAP and IFRS.

Recognition—U.S. GAAP.

Measurement—U.S. GAAP.

Recognition—IFRS.

Measurement—IFRS.

CHAPTER 19 Nonmonetary Transactions.

Sources of U.S. GAAP and IFRS.

Recognition and Measurement—U.S. GAAP.

Recognition and Measurement—IFRS.

Advertising Barter Transactions—U.S. GAAP.

Advertising Barter Transactions—IFRS.

CHAPTER 20 Special Fair Value Issues of Not-for-Profit Organizations.

Introduction.

Noncash Contributions of Assets.

Contributed Use of Assets.

Promises to Give.

Contributed Services.

Matching Requirements.

CHAPTER 21 Fair Value Disclosure Issues.

Introduction.

Sources of Disclosure Requirements.

Financial Instruments.

Impairment Losses.

Uncertainties.

PART V DETECTION OF FAIR VALUE ACCOUNTING FRAUD.

CHAPTER 22 A Framework for Detecting Fair Value Accounting Fraud.

Assessing the Risk of Fraud.

Understanding How Fair Value Impacts the Financial Statements.

External Factors that Indicate Risk.

Internal Risk Factors.

Materiality.

Internal Controls over Fair Value Accounting.

The Risk of Management Override.

Framework for Fair Value Accounting Fraud Detection.

Auditing Standards.

Auditor Independence.

CHAPTER 23 Use of Ratios and Other Analytical Procedures.

Analytical Procedures as a Fraud Detection Tool.

Horizontal Analysis.

Vertical Analysis.

Operating Ratios.

Customized Ratios.

Appendix A Summary Checklist of Fair Value Accounting Fraud Risks.

Appendix B SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting.

Appendix C Internal Controls over Fair Value Accounting Applications.

Bibliography.

About the Author.

Index.

Gerard M. Zack is President of Zack, P.C. and is a nationally recognized expert on accounting, audit, internal control, and fraud issues. He is a regular speaker at AICPA and Association of Certified Fraud Examiner (ACFE) conferences and events, and is the author of Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection (Wiley). In its December 2008 report on the use of fair value accounting in the United States, the Securities and Exchange Commission (SEC) soundly endorsed the use of fair value accounting, encouraging the expansion of fair value applications in financial statements, while also supporting clarification and simplification of fair value accounting standards.

Providing much-needed, practical guidance that simplifies an intimidating topic, Fair Value Accounting Fraud: New Global Risks and Detection Techniques is a nuts-and-bolts book dedicated to equipping fraud investigators and auditors to understand the many risks of fraud based on how fair value accounting is utilized in the preparation of financial statements.

Not designed as a how-to book on performing business or asset valuations, Fair Value Accounting Fraud instead familiarizes professionals with the ins-and-outs of fraud issues in fair value accounting with discussion of:

• The Use of Fair Value Measurements in Financial Statements
• Methods of Determining Fair Value
• Recent Changes to Fair Value Accounting Standards
• Asset-based Fraud Schemes Involving Fair Value
• Investments in Debt and Equity Securities
• Intangible Assets
• Nonmonetary Transactions
• Business Combinations
• Liability-based Fraud Schemes
• Comparison of U.S. GAAP and IFRS
• Special Fair Value Issues of Not-for-Profit Organizations
• Fair Value Disclosure Issues
• Internal Controls for Fair Value Accounting
• Detection of Fair Value Accounting Fraud

Author Gerard Zack, nationally recognized accounting, audit, and fraud expert, clearly demonstrates his experience in this subject, providing readers with an overview of the fair value applications, how those applications differ under U.S. and international accounting standards, as well as some of the most commonly used methods, especially as these subjects relate to the primary focus—the risk of financial reporting fraud.

Conversational in tone with valuable insights, Fair Value Accounting Fraud lifts the veil of confusion from the substantial and growing requirements for understanding the various methodologies used in determining and detecting fair value accounting fraud.

Praise for Fair Value Accounting Fraud: New Global Risks and Detection Techniques

"This interpretive guide to financial reporting is essential for recognizing and truly appreciating the creativity spawned from the fair value accounting rules. This book is the most comprehensive treatment of the topic that I know of. Accountants, auditors, and fraud examiners will find it invaluable in understanding and detecting fair value tricks."
—James D. Ratley, CFE, President, Association of Certified Fraud Examiners

"This timely book is a must for auditors, investigators, and anyone who analyzes or relies on financial statements. Zack offers expert analysis and thorough and practical guidance on a complex, emerging global issue in financial reporting fraud."
—Frank W. Abagnale, Author, Lecturer, Consultant, Subject of the motion picture, "Catch Me If You Can"

"Must-read for anybody working in the accounting field. It's loaded with a practical approach to understanding the complexities of fair value accounting."
—Wayne Berson, CPA, Atlantic Region Business Line Leader, BDO Seidman, LLP

With crystal clarity, Fair Value Accounting Fraud: New Global Risks and Detection Techniques provides auditors and fraud investigators with explanations of the many fraud risks pertaining to fair value accounting issues, as well as best practices for internal controls over fair value accounting applications.

Gerard Zack, a top expert in the field, provides much-needed insight, demystifying this topic with practical advice and helpful knowledge, making it a trusted reference on the ins-and-outs of financial statement fraud involving fair value issues.