1. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-1 Today’s Topics n Shenanigan #5 n Shenanigan #6

2. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-2 Shenanigan #5- Liability Games… Failure to record or understatement n Technique #1: n Failure to record-intentional or unintentional n Technique #2: n Reducing liabilities by changing assumptions-tax provisions and reserves n Technique #3: n Questionable cookie jar reserves-Chainsaw Al Dunlap and Sunbeam Corporation n Technique #4: n Sham rebates-rebate used to reduce COGS n Technique #5: n Early revenue recognition versus revenue received in advance

3. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-3 Shenanigan #6 n Shifting revenue to a future period n Why would we want to do this? n What is the benefit? n Fraud vulnerability charting of this fraud

4. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-4 Why Do It? n Reserves for a “rainy day” n Investor benefit post merger

5. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-5 Techniques n Creation of “cookie jar” reserves n Revenue hold back before an acquisition

6. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-6 “Cookie Jar” Reserves n W.R. Grace, Heinz & MSFT examples n Warning signs n Excessive use of reserves n Post-dating of shipping documents n Smoothing income…flat-line even (Stryker)

7. FORENSIC ACCOUNTING - BA124 - 2009Slide 14-7 Revenue Holdback n Tyco and Medaphis n Hold back revenue today n Reverse it into income after the acquisition