Financial Statement Fraud Find a company (or other public entity) that has been the subject of a financial statement fraud in the last 3-5 years. Pull that company’s financial statements (and public...

Financial Statements Fraud
(Roadrunner Transportation Systems, Inc)
Table of contents
    1. Describing the fraud
    2. Red Flags
    3. Fraud Examination
    4. Ratio Analysis
Financial Statements Fraud
(Roadrunner Transportation Systems, Inc)
1. Describing the Fraud
In general, fraud is an activity performed intentionally for personal benefits or harming another person. Let’s refer the definition of fraud given in SAS 99‘- Consideration of Fraud in a Financial Statement Audit’. Accordingly, fraud is an act performed intentionally to manipulate financial statements resulting in a material misstatements.
Types of fraud specified in this standard are misstatements due to deceptive financial reporting and usage of assets inappropriately. 
There may be two objectives behind financial statements fraud. First, company insiders who embezzles company funds or misappropriate those funds uses fraudulent accounting techniques to cover up such activities. Another one is, issuance of fraudulent financial statements by management to mislead stakeholders about the profitability and future growth of an organisation. [Leap 2007].
Accounting fraud makes unfavourable effects on wealth of shareholders due to changes in share price (Gerety/Lehn, 1997). Also, it effects real activities of an organisation and these cost can be measured in terms of low sales, higher financing costs, enforcement and legal costs, etc. Financial statement fraud shows negative side to non-shareholders too like creditors, suppliers, personnel, etc which is more than direct and indirect losses incurred by shareholders. (Velikonja, 2013).
As the transactions happening in the entities are becoming more complex , fraud and manipulations being buried in the legal transactions , information and documentation are becoming easier to perform (Kenyon and Tilton , 2006). Therefore, traditional concept of audit is not sufficient and auditors have to hit their head and investigate everything rigorously during all auditing processes. SAS-99 casts an obligation on auditors to use 42 red flags in financial statement audits to detect fraudulent financial reporting. (Yucel, Elif, 2013).
Roadrunner Transportation Systems Inc- Fraudulent financial statement
Roadrunner Transportation Systems Inc (Roadrunner) is engaged into business of logistics services. The Securities and Exchange Commission (SEC) alleged that former officials had not shown expenses and deferred them by spreading in various quarters so that their impact can be minimized on net earnings. Further, there was a failure in writing-off overvalued assets and receivables.  According to the SEC’s complaint, officials of Roadrunner also misled external auditor about these misstated accounts resulting in material misstatement of its income and earnings per share in its reports submitted to SEC at regular intervals.
2. Red flags for fraud
Fraud affects all types of organisation irrespective of its size, location and industry. Fraud results in huge financial losses, reputational losses, etc. to an organisation. Fraud takes place after some alarming symptoms and signals known as red flags. Examples are, unusual transactions, accounting anomalies, personal behavioural changes, irrational accounting relationship, etc. (Albrech, 2012) Red flags are significant to detect fraud at initial stages. (Yucel, 2013).
SAS 99 classifies red flags on the basis of fraud triangle model. It consists of three components, namely, -
(a) Pressure: Often, executives in management or board or other employees...