Which of the following represents a timing difference financial statement fraud?

• A. Recognizing a percentage of completion for a construction project
• B. Recording revenue in Year 1 when payment is received but the service will be performed in Year 2
• C. Recognizing revenue in Year 1 when the service is performed, but payment is due in Year 2
• D. Waiting to record revenue on a contract until the project is complete

Answer: (B)

The key idea is recognizing revenue when it is earned, not when cash is received. In accrual accounting, revenue is earned as the service is performed or the goods are delivered, and control has passed to the customer. Recording revenue in Year 1 simply because cash was collected while the service will be performed in Year 2 front-loads income before the earnings process is complete. This creates an artificial boost to Year 1 earnings and is a classic premature revenue recognition—a timing distortion used to misstate results.

Other scenarios either reflect legitimate or different timing choices. Recognizing revenue using an approved percentage-of-completion method for a long-term contract is an acceptable method when properly estimated and matched to progress. Recognizing revenue in Year 1 when the service is performed but payment is due in Year 2 aligns with accrual principles. Waiting to record revenue until project completion defers income to a later period, which is a deferral rather than recognizing revenue early in the period.