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Balance Sheet Crime Scenes…

Where the Bodies are Buried.

IIA Orange County CA Chapter Luncheon

Kate Greenberg

March 22, 2010

AGENDA

What we are going to cover….

Balance sheet risks: Where the bodies are buried…

Control risks: Follow the cash!

Less quantifiable risks: Fuzzy logic anyone?

What’s your role and how IA can help.

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IIA Update –Cash Red Flags

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Red Flags Potential Impact Locator Tools

▪ Non-DHR bank accts FCPA/fraud/unauthorized exp Inquiry: DHR Treasury

▪ Cash accts not in GL FCPA/fraud/unauthorized exp Inquiry: staff, AP review

▪ Positive BOA balances Unreconciled AC, fraud, etc. Review detail, ask questions!

▪ Non-functional currency FX exposure, P&L impact Review detail, ask questions!

▪ Ex-US accts not pooled FCPA/fraud/unauthorized exp Review detail, ask questions!

▪ Flux in non-operating AC FCPA/fraud/unauthorized exp Review detail, ask questions!

▪ Old uncleared checks Escheat penaties Review detail, ask questions!

▪ Current Acct unreconciled Unexpected P&L impact Look at CA reconciliation

▪ Password sharing Fraud Inquiry: staff, AP review

▪ SOD issues Fraud Process walk-thru, CSAQ

▪ Outdated signature cards Fraud S/B on site, if not ask Treas

▪ "Omnipotent" POA Unauth bank accts, debt, fraud Review contracts; corporate docs

IIA Update –AR/BDA Red Flags

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Red Flags Potential Impact Locator Tools

▪ Back loaded AR aging Rev rec; surprise BDA adj Look at details, not just DSO

▪ Cliff "hanger" BDA method Rev rec; surprise BDA adj Clearly understand BDA method▪ Liabs booked as contra AR Rev rec; surprise BDA adj BS review; map local GL to Hyp▪ AR > 360, ext pmt terms Rev rec; surprise BDA adj Vet RR narrative, RR testing

▪ Unusual sales Ts & Cs Rev rec; surprise BDA adj Vet RR narrative, RR testing

▪ Open right of return Rev rec; surprise BDA adj Ask for CM analysis, testing

▪ Large/unexplained CM Rev rec; surprise OPEX adj Look at CM trend

▪ Past due AC not on COD Rev rec; surprise BDA adj Look at aging; AR testing

▪ SOD issues (cash app, CM) Fraud, unauthorized exp Process walk-thru, CSAQ

▪ Old unapplied cash Rev rec; surprise BDA adj BS review

▪ Geography (NYC, Italy) Rev rec; surprise BDA adj Look at aging; Rev, AR testing

▪ Gov't accounts Rev rec; slow/no payment Look at aging; Rev, AR testing

▪ Co-mingled interco AR P&L bad guy Look at aging

▪ "Other" AR Fraud, unauthorized exp Look at support

IIA Update – INVENTORY Red Flags

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Red Flags Potential Impact Locator Tools

▪ Inventory outside plant Missing, damaged: overst'd inv Go to GEMBA, test counts

▪ Large capped demo stocks Missing, damaged: overst'd inv Review details of perpetual; inquiry

▪ Consignments (vendor/cust) Whose books? Go to GEMBA, inquiry

▪ Bill & hold Revenue rec; understated inv Go to GEMBA, inquiry, rev testing

▪ OSVP Missing or "hidden" inventory Trend analysis, vendor visits

▪ Limited scope PI Hidden, missing, overst'd inv Test counts, review of last P I

▪ Unprocessed returns Overst'd inv, unhappy customers Go to GEMBA, inquiry

▪ Cap variance method Surprise adj, underst'd inv Inquiry; review analysis

▪ E&O formula errors Surprise reserve adj Review Exel calculation

▪ E&O excl faulty assumpt Surprise reserve adj Inquire in detail about exceptions

▪ Expiry: shelf life, contract Surprise reserve adj Contract rev, disc w/ RA/QA, sales

▪ Product defects, recalls Surprise reserve adj Discuss w/RA/QA, operations

▪ Regulatory issues Legal, compliance issues Discuss w/RA/QA, sales

▪ LCM issues Overstated inventory Test selling price vs std cost

IIA Update –FIXED ASSET Red Flags

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Red Flags Potential Impact Locator Tools

▪Assets placed in service but still in CIP Depreciation catch-up adj Review CIP detail, aging, inquiry

▪Abandoned CIP Surprise write-off Review CIP detail, aging, inquiry

▪OSV Tooling Missing, idled: surprise write-off Review FA detail, validation results

▪Failure to validate in years Missing, idled: surprise write-off Inquiry, testing

▪Useful lives, cap threshold ≠ DHR Policy Surprise write-off, write-down Review FA, depreciation detail

▪Lots of DBS activity Missing, idled: surprise write-off Discuss w/ DBSL, ops, testng

▪No Move, Abandon, Disposal (MAD) process Missing, idled: surprise write-off Disc w/ops & finance, testing

▪Incorrect RE lease acctg Escalation, holiday catch-up adj Review lease terms, entries

▪Abandoned LHI on books Surprise write-off Review FA detail, validation results

IIA Update – GW, Intangibles & Other Assets Red Flags

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Red Flags Potential Impact Locator Tools

▪ GW-Intangible misclass Surprise amortization catch-up Review recon support, OBS

▪ Pre-FAS 142 GW Incorrect amortization Review recon support, OBS

▪ Old Post-FAS 142 GW Failure to adopt 142, amort adj Review recon support, OBS

▪ No impairment analysis Surprise write-down, write-off Review OBS, inquiry GM, finance

▪ Intangibles w/ no amort Surprise write-down, write-off Inq & rev: What is it? Why no amort?

▪ Old "expired" pre-paids Surprise write-down, write-off Look at prepaid detail, roll-fwd

▪ "Other" assets (excl Tax) Fraud, reclass issues Look at detail support

IIA Update –AP Red Flags

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Red Flags Potential Impact Locator Tools

▪ SOD issues (system, check stock) Fraud, unauth exp Process walk-thru, CSAQ

▪ Debit balances Incorrect classif, fraud Review detail

▪ Misclass between AP, accrueds K PI "gaming" Look at recon, support

▪ Co-mingled trade & interco AP Inventory issues, Interco AC OOB Look at details

▪ GRNI/GRIR/Univoiced Receipts Overst'd liab, underst'd inv Review aging; process walk-

through▪ AP denominated in FX FX exposure, surprise adj AP testing; inquiry

▪ Decentralized invoice receipts Understated AP, liabilities Process walk-thru, AP testing

▪ Procurement outside normal proc Fraud, unauth expense Process walk-thru, CSAQ

▪ "Split" P.O.s to same vendor Control circumvention, fraud Review detail, AP testing

▪ No "one up" review of T&E FCPA, fraud, abuse Test sample, esp GM, sales

▪ P Card mismgmt, abuse FCPA, fraud, abuse Review detail, card limits

▪ Unreconciled P Card accts Surprise adjustment Review rec, process walk-thru

▪ Unreconciled Trendset acct Surprise adjustment Review detail, card limits

▪ Unsettled interco AP Surprise adjustment, AR issues Review detail, card limits

IIA Update– Accrued & Other Liabilities Red Flags

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Red Flags Potential Impact Locator Tools

▪ Old OBS accounts Reverse to GW, below OP BS review, look at support

▪ Old Pension & OPEB accounts Unrecog liab, self-dealing: P&L Discuss w/HR, look at plan

▪ Non-statutory pension plans Unrecog liab, self-dealing: P&L Discuss w/HR, look at plan

▪ Non-std benefits plans Unrecog liab, self-dealing: P&L Discuss w/HR, look at plan

▪ Old restructuring accounts Reverse to GW, below OP BS review, look at support

▪ Other dormant accounts Unpleasant surprises: P&L BS review, look at support

▪ Outdated or missing support Unpleasant surprises: P&L BS review, look at support

▪ Assumps, analysis not supported Unpleasant surprises: P&L Read underlying docs

▪ Rebates: support ≠ contract terms Unpleasant surprises: P&L Read contracts, test

▪ Royalties: support ≠ contract terms Unpleasant surprises: P&L Read contracts, test

▪ Warranty: support ≠ published Ts & Cs Unpleasant surprises: P&L Read standard Ts & Cs

▪ Warranty not recon to BU reimbursmt Double counting Review reconciliation

IIA Update– Accrued & Other Liabilities Red Flags

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Red Flags Potential Impact Locator Tools

▪ "Hidden" pmts (free goods, mktg, T&E) Rev rec: (round tripping), 1099 AP, AR inventory testing

▪ Large, unanalysed CM Unpleasant surprises: P&L Credit memo testing

Faulty assumptions re: ret goods Unpleasant surprises: P&L Inquiry, CM testing

▪ Commissions: support ≠ written plans Unpleasant surprises: P&L Read contracts, test

▪ Vacation: support ≠ written plans Unpleasant surprises: P&L Read contracts, test

▪ Legal AP not reconciled to accrual Double counting Review reconciliation

▪ Lots of adj : esp round numbers SOC issue Look at trends, AJ Es

▪ Other evidence of "smoothing" P&L

impact

SOC issue Look at trends, AJ Es

▪ Lack of good QDQ process Unpleasant surprises: P&L Discuss w/GM, CFO

▪ Long term consulting/temps not on PR Labor, tax issues Discuss w/HR, test AP

IIA Update - Tax & Equity Accounts Red Flags

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Red Flags Potential Impact Locator Tools

▪ Late "push down" entries Incorrect entries Look at ME AJ Es, support

▪ Top side entries Errors, disconnects Look at support, understand facts

▪ Lack of underlying support Incorrect, fraudulent J E's Look at ME AJ Es, support

▪ CTA used as "plug" Incorrect, fraudulent J E's Ask for roll-fwd, understand facts

▪ No stat to US GAAP recon Fraud, error Stat audit report, understand facts

▪ Unexplained stat - GAAP difs Fraud, error Stat audit report, understand facts