Fraud Financial Statement Chart

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How to Use a Financial Statement Fraud Matrix in Business Litigation

By Robert Bates CPA, Esq.
In complex shareholder disputes, partnership dissolutions, and corporate embezzlement cases, bad actors rarely leave a simple paper trail. Instead, they weaponize accounting entries to alter reality—either inflating assets to attract investment, or burying profits and inflating liabilities to shortchange a business partner.
As a CPA, CFE (Certified Fraud Examiner), and former corporate CFO, I utilize a structural fraud matrix to systematically audit books during the discovery phase of a lawsuit. When business litigation attorneys hand me a chaotic “data dump” of QuickBooks files and bank statements, this matrix serves as the diagnostic framework to uncover where numbers are being manipulated.
Below is a comprehensive breakdown of the most common illegal accounting maneuvers used to distort financial statements. By understanding these manipulation patterns, litigators can write more precise document subpoenas and identify key targets for depositions.

 

By Robert L. Bates, JD, CPA

EXAMPLES OF ILLEGAL ACCOUNTING MANIPULATIONS TO INCREASE OR REDUCE ASSETS

  Increases of Assets Reductions of Assets
Noncurrent Assets
  • Incorporate inexistent assets (work in progress, goodwill, etc.)
  • Activate expenses fraudulently
  • Increase fictitiously the value of noncurrent assets
  • Amortize (or make provisions or deteriorate) noncurrent assets less than prescribed by the regulation
  • Excess deferred tax assets in a company with many losses
  • Hide noncurrent assets
  • Reduce fictitiously the value of noncurrent assets
  • Amortize (or make provisions or deteriorate) noncurrent assets more than prescribed by the regulation
Financial Investments
  • Inventing financial investments
  • Mark down financial investments less than prescribed by the regulation
  • Use of difficult-to-understand derivative financial instruments to hide fraud
  • Hide financial investments
  • Mark up financial investments prescribed by the regulation
  • Use of difficult-to-understand derivative financial instruments to hide fraud
Inventory
  • Invent physical units of inventory
  • Increase fictitiously the unit price of inventories
  • Hide physical units of inventory
  • Fictitious reduction of the unit price of inventories
Customers
  • Invent customer balances
  • Fraudulently reduce defaulting
  • Hide customer balances
  • Fraudulently increase defaulting
Other Debits
  • Invent debit balances
  • Hide debit balances

EXAMPLES OF ILLEGAL ACCOUNTING MANIPULATIONS TO INCREASE OR REDUCE DEBTS

  Increases of Assets Reductions of Assets
Loans and Credits
  • Inventing debts with partners or with other creditors
  • Hide debts with partners or with other creditors
Provisions
  • Post fictitious provisions
  • Hide provisions
Pension Plans
  • Increase pension debt beyond what the regulation allows
  • Illegally hide or reduce pension debt
Suppliers
  • Inventing debts with suppliers
  • Hide debts with providers
Other Debits
  • Inventing debts
  • Consolidate subsidiaries by the global integration method without requirements for this
  • Hide debts
  • Not consolidate subsidiaries despite being obliged to do so
 
  • Use of difficult-to-understand derivative financial instruments to hide fraud
 Use of difficult-to-understand derivative financial instruments to hide frauds

EXAMPLES OF ILLEGAL ACCOUNTING MANIPULATIONS TO INCREASE OR REDUCE PROFITS

  Increases of Assets Reductions of Assets
Income
  • Fictitious income
  • Post deposits as if they were sales
  • Sales at prices above the market price in order to deceive with companies that don’t consolidate, with companies in tax havens or screen companies
  • Transfer reserves to income
  • Hide income and not post them
  • Post sales as if they were deposits
  • Sales at prices lower than prices outside the market in order to deceive with companies that don’t consolidate, with companies in tax havens or screen companies
Consumptions
  • Stop accounting for consumptions
  • Expenses at prices below market price in order to deceive companies that
    don’t consolidate or with companies in tax havens
  • Fictitious consumptions
  • Expenses at prices above market price in order to deceive companies that don’t consolidate or with companies in tax havens.
Depreciations
  • Fraudulently reduce depreciations
  • Fraudulently increase depreciations
Other expenses
  • Account for expenses charged to reserves instead of including them in the income statement
  • Hide expenses
  • Fraudulently account for expenses as investments
  • Expenses at prices below the market price in order to deceive with companies that don’t consolidate or with companies in tax havens
  • Invent expenses
  • Fraudulently account for investments as expenses
  • Expenses at prices above the market price in order to deceive with companies that don’t consolidate or with companies in tax havens
Provisions
  • Fraudulently reduce provisions
  • Fraudulently increase provisions
Impairment of assets
  • Fraudulently reduce impairments
  • Fraudulently increase impairments
Financial Income and Financial Expenses
  • Incorrectly assessing the results generated in financial instruments or other assets (to transfer results from one year to another)
  • Incorrectly assessing the results generated in financial instruments or other assets (to transfer results from one year to another)
 
  • Hide financial expenses
  • Use of difficult-to-understand derivative financial instruments to hide fraud
  • Hide financial expenses
  • Use of difficult-to-understand derivative financial instruments to hide fraud
Results from Subsidiaries
  • Inflate profits from investees
  • Invest losses from investees

hpaccounting.com 

https://hpaccounting.com/cfo-cpa-cva-cfe-jd-valuation/

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