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"Hocus-Pocus Accounting" by Douglas R. Carmichael, Journal of Accountancy, October 1999; Vol. 188, Iss. 4; pg. 59, 5 pgs Abstract:
SEC Chairman Arthur Levitt decried what he termed "accounting hocus-pocus" and called for coordinated efforts to uncover it. He targeted the practice by some companies of improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transaction involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent auditors' awareness of problems associated with these practices. Full Text:|

Copyright American Institute of Certified Public Accountants Oct 1999| [Headnote]
Where there's revenue-recognition deviation, there could be fraud. SEC Chairman Arthur Levitt decried what he termed "accounting hocus-pocus" and called for coordinated efforts to uncover it. He targeted the practice by some companies of improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transactions involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent auditors' awareness of problems associated with these practices. Public companies feel pressure to report quarterly earnings that meet or exceed analysts' expectations-after all, failure to meet those expectations can hurt companies' stock prices. This pressure can lead to practices that sometimes include fraudulent overstatement of quarterly revenue. Any of the improper and unusual revenue-transaction methods used to misstate quarterly revenue also can be used to change annual results. Auditors need to be alert to the whole gamut of warning signs that revenue-recognition fraud may be present. BILL-AND-HOLD SCAMS

Although the bill-and-hold method is not in itself a GAAP violation, it's difficult to audit and has long been associated with incidents of financial fraud. Bill-and-hold fits the fraud-risk-factor description in SAS no. 82, Consideration of Fraud in a Financial Statement Audit: unusual and highly complex transactions that pose difficult substance over form questions. In a bill-and-hold deal, the customer agrees to purchase goods, but the seller retains possession until the customer requests shipment. An example: A municipality building a sanitation plant buys equipment for the facility and delays delivery until it's completed. The seller may be able to book revenue even though nothing has been exchanged physically. This is a legitimate business purpose for a bill-and-hold arrangement because two conditions are met: (1) realized or realizable and (2) earned. FINANCIAL FRAUD

GAAP requires that revenue recognition be based on whether the revenue is realized or realizable and earned. Revenues commonly are recognized at the time of sale, usually meaning delivery. Because revenue recognition on bill-and-hold transactions departs from this general practice, the auditor must know how and why a company maintains that using this method is justified. In recent enforcement actions, the SEC said a transaction must meet all of the following conditions to justify revenue recognition: * The risks of ownership must have passed to the buyer.

* The company must have from the customer a fixed commitment to purchase, preferably in writing. * The buyer-not the seller-must have requested the transaction and must have a substantial business purpose for a bill-and-hold deal. * There must be a fixed delivery date that is reasonable and consistent with the buyer's business purpose. * The seller must not retain any significant specific performance obligations, such as an obligation to assist in resale. * The goods must be complete and ready for shipment and not subject to being used to fill other orders. The...
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