Round-tripping

Definition

Round-tripping is a form of financial statement fraud where a company artificially inflates its revenue by selling an asset to another company while agreeing to buy it back at the same or similar price. This creates the illusion of higher sales and can mislead investors and regulators about the company's financial health.

5 Must Know Facts For Your Next Test

1. Round-tripping typically involves two companies engaging in reciprocal transactions that have no real economic value.
2. It is often used to inflate revenue figures without any genuine increase in business activity or cash flow.
3. Regulators such as the SEC closely scrutinize round-tripping due to its potential for misleading investors.
4. Round-tripping schemes can lead to severe legal consequences, including fines and imprisonment for those involved.
5. The Sarbanes-Oxley Act was enacted partly to prevent such fraudulent activities by improving internal controls and increasing financial transparency.

Review Questions

Related terms

Revenue Recognition:

The process of recording revenue when it is earned and realizable, regardless of when payment is received.

Sarbanes-Oxley Act:

A law passed in response to corporate fraud scandals aimed at protecting investors by improving accuracy and reliability of corporate disclosures.

Internal Controls:

Processes implemented by a company to ensure the integrity of financial reporting, compliance with laws, and efficient operations.