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Investigation of Segment Reporting Fraud

Investigation of Segment Reporting Fraud. Researched by: Dana Hollie, Ph.D., MBA, CPA Destinee’ McKinney, Grambling State University. What are Business Segments?. Farlex Financial Dictionary describe Business Segments as:

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Investigation of Segment Reporting Fraud

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  1. Investigation of Segment Reporting Fraud Researched by: Dana Hollie, Ph.D., MBA, CPA Destinee’ McKinney, Grambling State University

  2. What are Business Segments? Farlex Financial Dictionary describe Business Segments as: • “A division or subset of a business' operations, especially in large corporations.” • Kraft Food is an great example of a corporation that has segments.

  3. What are BusinessSegments ? Cont’d Kraft Foods Business Segments includes: • Beverages - (Kool aid) • Cheese & Food Service - (Kraft Singles) • Convenient Meals - (Kraft Mac & Cheese) • Grocery - (Jell-O) • Snacks & Cereals - (Oreo)

  4. Segment Reporting Fraud? • Is the result of a company purposely misstating their business segment operating income. • They commit this fraud to keep the company financial image as a whole looking good to the investors.

  5. The Purpose of this Investigation Is to identify : • Companies with questionable segment reporting problems. • The years in which the fraud has occurred. • The outcome of the issues. ie: If is was misstatements, error, or just plain fraud committed on the segment annual report.

  6. Significance of this Investigation Is to address: • The number of companies that committed segment fraud after 1990. • The amount that was overstated in their segment annual earnings. • How and why did the company commit the fraud. • The outcome of the company after the SEC investigation.

  7. Raytheon Company The Raytheon Company committed segment reporting fraud by: • Inflating the financial results of Raytheon Aircraft Company segment of the annual report. They did this by: • Prematurely recording revenue on the sale of unfinished aircraft through improper “bill and hold” transactions.

  8. Raytheon Company Con’t They overstated their reported net sales approximately by: • $ 80 million in 1997 • $ 110 million in 1998 • This led to 13 % overstatement of the RAC segment of the annual operating income from the two years.

  9. Overview of method used Descriptive statistics • To describe the amounts and the percent that was approximately overstated in 1997 and 1998.

  10. Questions or Comments?

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