Other Manipulations to Consider


Other Manipulations to Consider

“Ghost Goods: How to Spot Phantom Inventory” ( JofA, June01, page 33) raised some excellent points about how companies can commit fraud by manipulating inventory costs and/or quantities.

The article had one drawback, however. It failed to point out there are a number of ways a company can use inventory valuation methods to manipulate profits in various economic environments.

For example: Under inflationary conditions, a company electing to use the Fifo method would be considered highly aggressive. This is because the inventoried items sold would have been carried at their lower manufacturing costs, understated relative to current conditions, to produce higher profits.

Conversely, a company which operates in a high-tech area, such as computer equipment manufacturing, would be seen to be taking an aggressive stance if it chose the Lifo method, because cost trends in this area have tended to decline—items produced earlier may have higher costs than current production. Once again, the inventory valuation method will lead to increased profits.

Similarly, the methods can be used to influence cash flows. If a company used the Lifo method in an inflationary period, a lower reported profit and lower taxes would result, thereby increasing cash flows.

Because there are ways to influence profits without committing outright fraud, auditors need to be aware of these kinds of choices, since they go directly to corporate management’s state of mind. If management is willing to push the rules to the limit, and use unorthodox methods, the question then becomes, How far will it go?

Mark S. Glochowsky
Senior Accountant
Gerber Plumbing Fixtures Corp.
Lincolnwood, Illinois


Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.


News quiz: Retirement planning, tax practice, and fraud risk

Recent reports focused on a survey that gauges the worries about retirement among CPA financial planners’ clients, a suit that affects tax practitioners, and a guide that offers advice on fraud risk. See how much you know with this short quiz.


Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.