Although Camico uses the soon-to-be-upgraded SAS 82, Consideration of Fraud in a Financial Statement Audit, as a partial source for these issues, it also incorporates suggestions from the Association of Certified Fraud Examiners (ACFE). As a result, these will continue to be valid areas on which CPA firm auditors should train a sharp eye:

Revenue substance vs. form. Actual revenue (substance) can be manipulated by transactions that change it from one form to another and can be misstated by the use of fake customers, receivables, and shipments. Beware of "significant, unusual, or highly complex transactions, especially those close to yearend, that pose difficult 'substance-- over-form' questions," warns SAS 82.

Inadequate disclosures. Confusing footnotes, such as those used for Enron's special-purpose entities (SPEs) transactions, can cast doubt on the financial statement. If the client includes both a governing board and management personnel, consider whether disclosures are made to both board and management-dual disclosure often makes sense.

Related party transactions. Using Enron as an example again, its SPEs, such as limited partnerships with outside parties, allowed the company to increase leverage and return on assets without having to report debt on the balance sheet. There is also a potential conflict of interest if managers' or owners' self-interest is-or appears to be-in conflict with the best interests of the company and its shareholders.

Improper asset valuations. Accurate valuation often requires special expertise. Without quoted prices as the base for valuation, a company could develop and use discretionary valuation models based on its own assumptions and models.

Premature revenue recognition. Two examples: In the first, the company takes subscription revenue for a multi-year period, obligating it to multi-year expenses, and then recognizes all the revenue in a one-year period. The second is "billing and holding," which creates accounts receivable but lets the company hold the goods, sometimes to ship later, sometimes not at all. This is often used with just a few large customers. Large journal entries at year-end can be the tip-off for this and other frauds.

Percentage-of-completion accounting. Multi-year projects for which most of the cash is paid in the first year but revenue is spread over the project's duration often indicate fraud. This is especially common among contractors, who are prone to estimating that a project is closer to completion than it really is, which lets them recognize more revenue sooner than they should.

Improper treatment of sales. Conditional sales -- those contingent on other transactions, which are sometimes counted as final sales -- are an example. Sometimes final sales are reversed but are not indicated as such on the books and, therefore, are not reconciled with inventory. Inventing customers, accounts receivable, and shipments is another way to misstate sales.

Deferral of costs and expenses. WorldCom's classic misstatement of operational expenses as capital expenditures is a horrifying example of what this can mean. Expenses may be deferred simply by not posting costs and expenses until the next period.

Other indicators:

-- Business relationships deteriorating because those involved in fraud have little respect for others.

-- Auditor independence breaking down from complacency and over-reliance on management representations. Juries are more likely to believe CPAs know about fraud in companies with which they had long relationships.

-- Successful companies are less likely to have their operations questioned than those that are in trouble.

Source: Impact 57 (Fall 2002), Camico (www.camico. com)