Many financial reporting frauds have historically been associated with business combinations accounted for as purchases. History shows that the improper concealment of losses through off-the-books entities, misallocation of the purchase price, mis-valuation of a minority interest, or the use of “cookie jar” reserves can all lead to allegations of misleading financial reporting.
Among the lessons to be learned by management from the most recent Xerox investigation are that companies making business acquisitions must carefully scrutinize accounting by targeted companies, since the acquirers may have to suffer the cost, embarrassment and reputational harm of infractions committed by predecessor managers.
For auditors, the lessons include the need to very closely review both the accounting for the acquisitions themselves and the accounting practices of the acquirees. Failures to do so can have serious consequences for all concerned.
About the author: Accounting expert Barry Jay Epstein, Ph.D., CPA, CFF, is a principal in the forensic accounting and litigation consulting practice in the Chicago office of Cendrowski Corporate Advisors LLC, where he consults on accounting and auditing technical matters and provides forensic accounting and litigation services. Dr. Epstein is the author of the Warren, Gorham & Lamont Handbook of Accounting and Auditing, and was for many years the lead co-author of Wiley GAAP, Wiley IFRS, and Wiley IFRS Policies and Procedures. He can be contacted at firstname.lastname@example.org at 312-464-3520.
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