Session 7

Question 1

Does the SEC prefer to nail larger or smaller companies?

Answer 1

They could prefer to nail smaller, as they are easier wins. But the SEC has unofficially said they prefer larger because that is better publicity for them and would secure more funding.

Question 2

What is the most common fraudulent company profile?

Answer 2

Smaller companies that are just above breakeven.

Question 3

What stock market are fraudulent companies most commonly found?

Answer 3

NASDAQ

Question 4

What is the number one fraudulent industry and why?

Answer 4

Tech companies because the industry is complex (opportunity) and volatile (pressure)

Question 5

Accrual based EM

Answer 5

estimate based EM that is less common because it is dangerous with legislation and auditor attention on it

Question 6

Real Earnings Based Management

Answer 6

transaction based EM that involve cutting R&D or advertising, strategic timing, intentionally over producing inventory, etc.

Question 7

What’s the issue with real EM?

Answer 7

You have to justify decisions based on business purposes, not in order to make a goal. But you are actually just doing it to make a goal.

Question 8

Example of real earnings management

Answer 8

Postponing a plant’s maintenance to keep production going in order to make a goal, but you says its because you consulted the engineers and everyone agreed its not needed to do the maintenance yet.