Content area
Full Text
Identifying and Accounting for Increasingly Common Anangements
ore than a decade ago, the AICPA alerted the accounting profession to the use of "round trip" transactions in Practice Alert 2003-01:
Round trip or linked transactions occur when a company enters into a seemingly valid sales transaction with a customer but sends all or some of the sales proceeds back to the customer in another seemingly valid purchase transaction. . . . These types of transactions frequently occur in industries where analysts have focused on the revenue that companies display on financial statements instead of on income.
But the practice of manipulating revenues was not new when this alert was issued. Whether they are auditors or CFOs or controllers (this article assumes that controllers are a company's principal accounting officers), CPAs have been dealing with revenue distortions for at least 50 years. About 10 years ago, business conditions and technology changes combined to create new opportunities for accounting treatments mat did not faithfully represent the underlying economic events.
Two main issues confront controllers and auditors who deal with these manipulations: 1) identifying and understanding the transactions and 2) establishing appropriate accounting. The ensuing discussion covers both of these challenges and provides sample transactions - primarily focusing on reciprocal transactions - based on real-life situations encountered by the author.
Accounting for Reciprocal Transactions
Reciprocal transactions occur between two businesses, wherein each is a buyer of the other's product or service. Businesses have long practiced reciprocity, but such transactions provide the opportunity for unscrupulous behavior; it is easier to construct illusory business transactions if the counterparty is a willing partner in the scheme and potentially stands to benefit from it
One common thread in reciprocal transactions is the counterparties becoming conspiring parties. Instead of each party only looking out for its own interests, reciprocal transactions cross the line and accommodate the party on the other side of the transaction. Accommodation mat strays too far creates the opportunity for significant misstatement of the accounting for one or both sides of the transaction. Crossing the line between counterparties can also result in outright fictitious accounting and fraudulent financial statements.
Some reciprocal transactions resemble barter exchanges or include a component mat resembles a barter exchange. Nonmonetary transaction accounting is codified in...