This is one of the most common issues which comes up in the context of group reorganisations or intercompany agreements. Giving a document a date which is earlier than the date when it was actually signed, would almost certainly constitute fraud.
Although it may have been intended to put in place a new arrangement by a particular date – often a year end – that date may now have passed. Obviously the ideal position is to put in place the legal documents in advance. Well, it depends on what was transferred, and whether it can be said that the relevant transaction has already happened.
As from that date, customers may have been invoiced by the transferee, employees may have been paid by the transferee, and accounting entries may have been made to reflect the purchase price payable for the assets.
Together, these factors may indicate that the beneficial interest in the relevant assets has passed from a legal point of view.
There are five basic methods companies use to create bogus profits (See “The Fraud Beat,” , Oct.00, page 93; and Mar.01, page 91 ).
One of them is fraud in timing differences, also called cut-off fraud.
Documenting a transaction which has already happened One possible scenario is that the relevant transaction has already happened, but just hasn’t been documented yet.
By recognizing these often simple schemes CPAs can usually detect material financial statement frauds early, before they become catastrophic.
Proper accounting cut-off tests prevent most of these problems, but not all.
A Boca Raton, Florida, company programmed its time clocks to stop at exactly am on the last day of each quarter. Alert auditors uncovered the scheme when they noticed a batch of time cards all stamped with the same date and time.
According to GAAP, revenue is recognized when the earnings process is complete and the rights of ownership have passed from seller to buyer.
Examples of rights of ownership include: possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.
The transaction should be ratified by minutes or resolutions of the participating entities.