Accounting expert Barry Jay Epstein co-authored an article titled, “Tax Heavens: Methods and Tactics for Corporate Profit Shifting,” with lead authors Mark Holtzblatt and Eva K. Jermakowicz, published in the January-February 2015 issue of the International Tax Journal.

Many studies conducted over the years have found that the most common vehicle for financial reporting fraud has been improper revenue recognition – although in a minority of periods this has been exceeded by manipulation of so-called “cookie jar” reserves, which are bogus estimated obligations that can be opportunistically reversed to compensate for earnings shortfalls.

Auditing is the process of obtaining and evaluating evidence that supports (or refutes) the material financial statement assertions made by management of the entity under examination.

Of the two major sub-categories of revenue recognition financial reporting fraud – premature recognition of real revenue, and recordation of wholly bogus revenue – the latter should, by all rights, be the easiest to detect, since extraordinary accounting measures have to be taken to perpetuate concealment of what are, after all, nonexistent claims to customer cash.

Fraud, and in particular financial reporting fraud, costs investors huge sums each year.  The headline cases – Enron, WorldCom, Adelphia, Parmalat – are widely reported and become MBA class case studies, but fraud is far more pervasive than these isolated major events suggest. 

The allocation of responsibilities between company management and outside auditors has long been clear.