Fishing in Revenue Streams

Revenue accounts are fraudsters' favorite targets in financial statement frauds because they often contain the largest numbers and high volumes of transactions within general ledgers. As CFEs, we need to understand the underlying causes and motivations for overstating revenues. But don't bury yourself in the ledgers; investigatory interviews and other analyses are imperative.

One of your longtime clients operates a growing local bicycle shop. For the past several years, the bank has allowed the shop to borrow money to purchase inventory just before spring. However, the bank is concerned about the poor national economy and the possibility of weak sales at the bike shop. The business' bank has extended a $100,000 line of credit, so it wants audited financial statements within 120 days of year end.

Levi, the bike shop owner, says he has to bring in the newest models by spring. "There's lots of competition these days and I'm asking my manager to really step up his efforts this year," he says.

Historically, the best sales months are in the spring and summer months. Levi tells you that he's contributed additional capital, in small installments, to the shop during the year. He says that over time, he's contributed $30,000 when the shop needed some extra cash.