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Revenue Misclassification and Other Improprieties: Recognition or misclassification of sales transactions that are not valid sales transaction due to terms being incomplete and/or other contingent information.

Improper classification/recognition of revenue: recognition of revenue from sales that are not completed sales transactions – i.e. goods on consignment, overselling goods to distributorships, and/or other buy-back/return agreements.

Improper revenue disclosures: Recognition of sales transaction (one-time revenue gain) without disclosing in footnotes that this was a one-time gain/transaction.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 204 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Reduction of inflated reserves: revenues created by reversing previously created expense reserves (cookie jar reserves – reserves that are created in good times to be used in bad times in order to increase income).

Revenue reduction: skimming revenue for regulatory rate increases.

Expense Expense/Cost Classification – Misclassification, non-recognition, or unauthorized expenses of the period.

Compensation Abuses; Unauthorized pay and bonuses, excess/unauthorized use of company assets, and backdating of stock options.

Fraudulent capitalization of current expenses: capitalizing expenses as assets (to be written-off over a period of time), when those expenses should be included as costs in the current period.

Expense or Cost Misclassifications/Manipulation: recording expense(s) in a later period than the period incurred, or changing the amount of an expense in the current period.

Non-recognition of losses: Disregarding or erasing expenses of the period.

Fictitious or inflated expenses to boost regulatory rates.

Big Bang Theory: The process of recordings more costs and expense during an accounting period than normal when (1) a restatement resulting in lower income is required to be filed or (2) a significant loss has occurred for the reported period.

Restructuring Costs (Fraudulent or Misclassified): using a loss/restatement situation to create a reserve (asset) for future restructuring/reorganization of the business by expensing the dollars in the current period (as required by Generally Accepted Accounting Principles, or GAAP). As the restructuring occurs in the future, the charges will be written off against the reserve account.

However, if the reserve is not needed, or if the reserve is overstated, then the unneeded dollars are added to income in the period for which it was determined the reserves were not needed.

Erroneous or Inaccurate reserves recorded: recording expenses in periods of high income to build “cookie-jar” reserves and/or to reduce income.

Write-downs; using a loss/restatement situation to write-down or write-off assets that will be used or sold at a later date. This will reduce the asset cost when sold in a later period thereby increasing income.

Income Inflation-Assets-Liabilities Inflated Income: Income is inaccurate, but the specific revenue or expense impact or detail is not available.

Only the income impact is provided.

Earnings inflation to meet analyst expectation; inappropriate use of reserves, false financial statements, etc.

Improper accounting to inflate income; bundling leases, insufficient disclosures, etc.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 205 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Fraudulent accounting schemes; Use of shell companies, erroneous reserves, etc.

Accounting errors; overstatement of perishable inventory, premature revenue recognition, etc.

Improper internal controls; internal controls that do not detect errors.

Assets overstated: Any situation where the specific revenue or expense detail is not available, but the

resulting asset(s) detail or impact is provided:

Mark-to-market abuse; recognize gross revenues as profits, which results in accounts receivables being overstated.

Assets not properly written down; inventory is overstated, goodwill is overstated, etc.

Overstating reserves through restructuring; Creating excess reserves based on the big-bang theory (see expenses above) or cookie-jar reserves (see revenue above).

Disclosures and Understated Liabilities: Any situation in which the specific revenue or expense detail is not available, but the resulting liability detail or impact is provided.

Non-Disclosure or inadequate disclosure of liabilities; debt and guaranteed loans are not disclosed, liabilities are not included in the financial statements in the appropriate manner, etc.

Improper off-balance-sheet financing of assets; inappropriate synthetic leases, etc.

Fraudulent use of SPEs and inadequate disclosure of SPE accounting issues; inappropriate reclassification of debt related to special purpose entities (SPE), SPEs listed that do not meet the SPE criteria, unauthorized SPEs; transfer of bad debt and other items to SPE inappropriately.

Non-recognition of liability; liabilities are not disclosed that should have been disclosed or presented in financial statements.

Theft – Misappropriation Inappropriate purchases/payments to/for employees/officers; Misuse of company assets by employees and officers.

Compensation and/or stock abuse by officers; granting of options or other stock payments to officers that are not included in the contract or does not meet company requirements for such actions.

Inadequate or no repayment of loan by officers/directors; loan repayments are dismissed, which result in a decrease in assets or earnings of the company.

Exogenous Factors Insider trading; an employee trades his/her company’s stock based on knowledge of an impending downturn or upturn in the company’s financial position, which thereby increases the employee’s financial position. Also, the employee’s sharing of this information with others (e.g., family or friends), who then act upon the employee’s privileged information.

Bribery/Influence Peddling; illegal payment by a company to a public official or private individual to gain favorable treatment for that company or the company’s goods and services.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 206 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Conflicts of interest; Taking a fiduciary position in a situation or making a fiduciary decision on an issue where the individual is not considered to be “independent” (i.e., the person has a personal or business relationship, stock owner, etc.).

Abetment/Accessory to malfeasance of others; assisting others in misrepresenting financial information.

Loan guarantees for executive; Excessive or inappropriate loan guarantees for employees or board members.

Related party transactions; Transactions occurring with the approval of, or sanctioned by, individuals with a personal or business relationship with the individual, organization or company that requires approval.


Corporate accounting malfeasance has led to a number of pieces of legislation and has increased the cost

of doing business for publicly traded companies. Below is a summary of some of the effects:

Increased Legislation: As a result of the growing number of accounting restatements from 1997 to 2002, new laws and regulations have been enacted to help curb this epidemic. The Sarbanes–Oxley Act of 2002 was one of the most significant pieces of legislation. SOX has resulted in more requirements for internal compliance by corporations, materially increases in the cost of business expenses, and greater accountability. The Internal Auditing industry has been one beneficiary of SOX. However, whether accounting malfeasance has actually decreased since SOX is an open issue. Recent research such as Scholz (2014) reports that the number of restatements reported has decreased from 2007-2012, which coincides with SOX’s 404 internal control requirement. However, whether this recent decline in reported activity is a direct effect of SOX is an open issue that researchers need to address.

Stock Price Declines: Companies engaged in malfeasance have experienced significant declines in stock price, and this downward trend continues over a longer time frame (compared to non-malfeasance companies). Investors tend to penalize these companies, and institutional investors shy away from these companies, until confidence in the company is restored.

The Move toward a Standardized Worldwide Accounting Reporting System: There has been a major shift around the world to standardize accounting reporting systems. By implementing such as system, the unclear, inconsistent and arbitrary accounting rules will move towards standardization. Effective in 2011, Canadian, Australian, and European publically traded companies are required to adhere to International Financial Reporting Standards (IFRS). Many believe that a single global set of accounting standards will minimize accounting malfeasance, while increasing comparability of diverse and global companies’ financial statements. The SEC worked with the IFRS on special joint projects, with the ultimate goal of adapting IFRS by the end of 2014. However, in November 2014, the SEC’s Chief Accountant James Schnurr had not made a formal announcement as to the SEC’s adoption of IFRS. As of December 8, 2014, the SEC announced it will seek comments on a proposal for voluntary IFRS adoption.


This paper gives an overview of corporate accounting malfeasance, explains some of its causes and the resulting legislative laws it has created. Additionally, a comprehensive listing is provided for the many different types of malfeasance activities, separated into the categories of income, expense, asset, theftmisappropriation and exogenous factors. Many questions remain, and further research should explore the following questions: 1. Has SOX 2002 helped to reduce the incidence of corporate malfeasance activity?

2. Does a standardized accounting system, such as International Financial Reporting Standards (IFRS), GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 207 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 decrease corporate malfeasance activity? 3. What are the malfeasance trends in Europe and Canada as well as other developed economies? 4. What impact does a financial burden on a company have on the likelihood of corporate malfeasance? 5. What should be the role of the external auditor in identifying accounting malfeasance? 6. Finally, what is the difference in malfeasance materiality and its resulting consequences between self-reported versus SEC imposed financial statement restatements? Although it is possible that the incidence of corporate accounting malfeasance can be reduced, due to its inherent nature, it is likely that corporate malfeasance will remain a permanent burden on the financial system.


American Institute of Certified Public Accountants. 1994. Improving Business Reporting-A Customer Focus; Meeting the Information Needs of Investors and Creditors. The Comprehensive Report of the Special Committee on Financial Reporting American Institute of Certified Public Accountants. 2006. Business Reporting, Assurance & Advisory Services. https://www.aicpa.org/innovation/scebr.htm Association of Certified Fraud Examiners. 2002. Report to the Nation Occupational Fraud and Abuse.

http://www.cfenet.com/publications/rttn.asp Committee of Sponsoring Organizations of the Treadway Commission (COSO). 1999. Fraudulent Financial Reporting: 1987-1997, An Analysis of US Public Companies.

Files, R., 2012. SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?. Journal of Accounting and Economics 53, 353-374.

Gerety, M. and K. Lehn. 1997. The Causes and Consequences of Accounting Fraud. Managerial and Decision Economics 18: 587-599.

Gillett, P. and N. Uddin. 2005. CFO Intentions of Fraudulent Financial Reporting. Auditing: A Journal of Practice & Theory 24: 55-75.

Heller, M., November 10, 2014. CFO.com, Chief SEC Accountant Revives IFRS Debate.

http://ww2.cfo.com/gaap-ifrs/2014/11/chief-sec-accountant-revives-ifrs-debate/ Huron Consulting Group. 2003. An Analysis of Restatement Matters: Rules, Errors, Ethics, For the Five Years Ended December 31, 2002. (January) Scholz, S., Center for Audit Quality, 2014. Financial Restatement Trends in the United States 2003-2012 http://www.thecaq.org/docs/reports-and-publications/financial-restatement-trends-in-the-united-statespdf?sfvrsn=2 Tysiac, K. Journal of Accountancy, December 8, 2014. SEC Will Seek Comments on New Possibility for Voluntary IFRS Adoption.

http://journalofaccountancy.com/news/2014/dec/ifrs-voluntary-adoption-201411476.html GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 208 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1




Clement Oppong, Cyprus International University-North Cyprus-Turkey Hasret Balcioglu, Cyprus International University-North Cyprus-Turkey Mehmet Aga, Cyprus International University-North Cyprus-Turkey


For years the economic growth of countries has been a complex phenomenon constantly influenced by number of both macroeconomic and microeconomic factors. Clarification of these economic factors has brought into recent literature two streams of opinions. For instance, theorists of microeconomic factors have opined that, before the initiation of global move for International Financial Reporting Standards (IFRS) in 2001, both policy makers and academics were agitating for the development of a unified financial reporting system with the hope that a unitary system of financial reporting will not only become internationally recognized financial reporting language, but will redesign the reporting style of financial reports to produce harmonized and comparable financial reports across national borders (Epstein, 2009;

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