| Course | ACC-7030 Emerging Issues in Accounting |
|---|---|
| Module | Module 2 |
| Paper type | Module 2 written assignment: forensic accounting and fraud |
| Length | About 711 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | MBA in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 7030 Module 2
Profit Up, Cash Down: Screening a Software Company for Revenue Fraud With Ratios and the Beneish Model
Student Name
MBA in Accounting, Thomas Edison State University
ACC-7030: Emerging Issues in Accounting
Mentor Name
Month Day, Year
Profit Up, Cash Down: Screening a Software Company for Revenue Fraud With Ratios and the Beneish Model
Introduction
Forensic accountants apply accounting, auditing and investigative skills to questions that may end up in litigation or regulatory proceedings. Unlike an auditor, who gives reasonable assurance that statements are free of material misstatement, a forensic accountant investigates a specific allegation and gathers evidence that must meet legal standards. Jackson (2015) organizes fraud detection around the idea that manipulation of one account leaves traces in related accounts, especially in the relationship between earnings and cash flow.
Part A: The Allegation and the Numbers
A sales operations employee alleged that the company shipped license keys to distributors at quarter end with side letters allowing returns.
Three patterns stand out. Receivables grew four times as fast as sales, so collection lagged recognized revenue. Net income rose while operating cash flow collapsed, the gap that Jackson identifies as the most common sign of aggressive revenue recognition. And gross margin fell despite higher sales, suggesting discounts or incentives to distributors.
| In millions | Prior year | Current year | Change |
|---|---|---|---|
| Revenue | $200 | $260 | +30% |
| Accounts receivable | 30 | 65 | +117% |
| Gross margin | 60.0% | 56.9% | -3.1 points |
| Net income | 20 | 34 | +70% |
| Cash flow from operations | 22 | 8 | -64% |
| Days sales outstanding | 55 | 91 | +36 days |
Part B: The Beneish M-Score
Beneish (1999) developed the model from companies known to have manipulated earnings and found that scores above about -1.78 identified most manipulators, with a meaningful rate of false alarms. Pinelands' score of -1.22 is driven mainly by the receivables index and accruals. The model does not prove fraud; it indicates where to look. Dechow et al. (2011) similarly found that accruals and changes in receivables are among the strongest predictors of material misstatements.
| Index | Value | Meaning |
|---|---|---|
| Days sales in receivables index | 1.667 | Receivables rising faster than sales |
| Gross margin index | 1.054 | Margins deteriorating |
| Asset quality index | 0.909 | No unusual capitalization |
| Sales growth index | 1.300 | Rapid growth, which creates pressure |
| Depreciation index | 1.227 | Slower depreciation |
| SG&A index | 0.892 | Overhead falling relative to sales |
| Total accruals to total assets | 0.079 | Earnings far above cash flow |
| Debt-to-assets index | 1.089 | Rising debt |
| M-score | -1.22 | Above the -1.78 threshold |
Part C: The Likely Scheme
The evidence fits a revenue scheme combining channel stuffing and side agreements. Shipping excess licenses to distributors at quarter end inflates revenue and receivables; side letters granting rights of return mean the sales did not meet revenue recognition criteria, since the company could not estimate returns or had not transferred control. Falling margins reflect extra discounts offered to distributors to accept stock. The slower depreciation could be a second, smaller lever, extending asset lives to lift earnings. Pressure is evident in the company's growth targets and a pending debt refinancing that requires earnings above a covenant level.
Other explanations should be ruled out before reaching a conclusion. A legitimate shift to longer payment terms for distributors would raise receivables but would appear in contracts and approvals; a change in the customer mix toward slower-paying hospitals would raise days sales outstanding without quarter-end spikes. The investigation should test these possibilities directly, since an honest explanation would end the inquiry.
Part D: Procedures to Confirm or Rule Out the Scheme
The forensic accountant should preserve evidence first by imaging email and file systems of sales and finance staff. Analytical work should compare revenue by distributor and by week, looking for quarter-end spikes followed by returns or credits early in the next quarter. Confirmations sent directly to distributors should ask about all terms, including return rights and side agreements, not only balances. Contracts and side letters should be searched for in email, using terms such as "return," "swap" and "guarantee." Interviews should start with the whistleblower and move from staff to managers, ending with executives once documents are in hand. The report should quantify any misstatement by quarter, identify who knew of the side letters and avoid conclusions about guilt, which are for the courts. If the scheme is confirmed, the audit committee must consider restatement, SEC disclosure and the effect on the debt covenant.
Throughout, the forensic accountant must remain objective and independent of management, report to the audit committee and document every step, since the work may be examined by regulators or in court.
References
Beneish, M. D. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55(5), 24-36. https://doi.org/10.2469/faj.v55.n5.2296
Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary Accounting Research, 28(1), 17-82. https://doi.org/10.1111/j.1911-3846.2010.01041.x
Jackson, C. W. (2015). Detecting accounting fraud: Analysis and ethics. Pearson.
What the ACC 7030 Module 2 instructions ask for
The forensic module's assignment asks students to read statements the way an investigator would. Expect questions on the forensic accountant's role, the fraud triangle, common financial statement fraud schemes in revenue, expenses, assets and liabilities, analytical red flags such as diverging earnings and cash flow, screening models such as the Beneish M-score and investigative procedures. Many prompts present a company's statements or a published fraud case to analyze. Pinelands Software is invented for this sample. Some versions ask you to compute other screening measures, such as accruals ratios or Altman's Z-score, or to analyze a published enforcement case.
Inside the ACC 7030 Module 2 example
The introduction distinguishes forensic work from auditing and states Jackson's principle that manipulation leaves traces. Part A presents the allegation and key figures, identifying three warning patterns. Part B computes and interprets the M-score index by index, with research on its accuracy and on predictors of misstatement. Part C identifies the scheme consistent with the evidence and the pressures behind it. Part D sets out procedures in order, from preserving evidence to reporting, and notes the audit committee's next decisions. Each index in the model is explained in plain terms, so the paper teaches the reader how to read the score. The procedures are listed in the order a forensic team would perform them.
Reading the ACC 7030 Module 2 grading rubric
A fraud screen like this one is worth 5 points of the ACC-7030 grade. For forensic work, mentors check correct ratio and model computations, interpretation that connects the numbers to a scheme, procedures that would confirm the scheme and an understanding of the forensic accountant's role and limits. Recognizing that screening models indicate risk but do not prove fraud shows judgment. Clear tables and citations to Jackson and research complete the grade. Procedures should follow from the scheme the numbers suggest, in an order that preserves evidence and would hold up in a legal setting. Recognizing that a screening model indicates risk rather than proving fraud is essential. Answers that test innocent explanations before concluding show the objectivity a forensic engagement requires.
ACC 7030 Module 2 help: mistakes that cost marks
Fraud analysis answers lose points by computing ratios without interpreting them, treating an M-score as proof and proposing procedures that would not reach the evidence, such as confirming balances without asking about terms. Tie each ratio to the account it points to. Describe the scheme the pattern suggests. Design procedures that would reveal side agreements or fictitious transactions. Explain what each ratio means for the account it measures before interpreting the overall score. Then design procedures that would confirm or rule out the scheme those ratios suggest. List alternative explanations for the pattern and test each one. A free first sample of your own ACC-7030 Module 2 case is available on request.
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ACC 7030 Module 2 questions, answered
Where can I find a free ACC 7030 Module 2 sample paper?
The software company fraud screen appears above: warning ratios, a Beneish M-score of -1.22, a likely channel stuffing scheme and forensic procedures.
What does a forensic accountant do?
Investigates specific allegations of fraud or financial wrongdoing and gathers evidence suitable for legal or regulatory proceedings.
What is the Beneish M-score?
A model combining eight financial ratios to estimate the likelihood that a company has manipulated its earnings.
Why is a gap between net income and operating cash flow a red flag?
Because earnings inflated by improper accruals, such as fictitious sales, do not generate cash.
What is channel stuffing?
Shipping more goods to distributors than they need, often with return rights or incentives, to inflate current revenue.