Early revenue recognition is a common example of what type of financial fraud scheme?

• A. Fictitious revenues
• B. Timing differences
• C. Improper disclosures
• D. Improper asset valuations

Answer: (B)

Recognizing revenue before the goods are delivered or the service is performed prompts a timing manipulation: the revenue is recorded in a period when it isn’t yet earned. This creates a difference between when the revenue should be earned and when it is recorded, allowing the company to boost current-period earnings. It’s about shifting timing rather than creating real new revenue, so it’s classified as a timing difference. This differs from fictitious revenues (creating sales that don’t exist), improper disclosures (misstating information), or improper asset valuations (overstating asset values). In practice, end-of-period tactics like recording sales before shipment or choosing bill-and-hold arrangements are classic examples of this timing shift, aimed at meeting financial targets by moving revenue into the current period.