Question

You are an associate at ABC LLP, a forensic accounting firm. Your company is retained by the Law Firm that is representing a client. The client, the former CFO of the Public Company, is being investigated by the SEC and FBI for apparently running a large accounting fraud scheme and funneling money to his own account through wire transfers after allegedly falsely invoicing sales during 2013 and 2014. The apparent account fraud scheme may have artificially inflated the company's stock price by 25% during 2013 and 2014.  The Auditing Firm audited the Public Company and issued opinion letters in connection with the Public Company’s 2013 and 2014 annual reports.

You are just getting up to speed on the case, but the ABC Partner asked for you to help analyze the issue in connection with the Law Firm.  

You're asked to analyze whether, in fact, the apparent scheme caused the company's stock price to be artificially inflated. Describe how you would conduct that analysis.  10 points.  

Answer 1

As per the given problem of, I have analyzed that booking dummy sales invoices i.e Falsely Invoicing Sales during 2013 and 2014 have increased the turnover of the company which in case will also shoot up the Gross profit as well as the net profit of the Company.

Now when there is a good profit in the reporting period, the share prices also increases because the investors starts expecting good results of the company in the future and there are more buyers to buy the share of the company i.e Increase demand and less or no supply of shares.

We can also conduct the ratio analysis of the financial statement of the company to identify the % increase in Share price due to increase in Dummy Sale and vice versa.