Financial Statement Frauds & creative accounting You need to know
In the past various listed companies have committed financial statement frauds through creative accounting. Their motives were either to manipulate share prices for their personal gain or to gain incentives by showing good performance and hiding bad news.
In current times, due to pressure from owners, lack of internal controls, and integrity, financial frauds are common and cost huge amounts of money to the economy and business.
Here are some Financial Statement Frauds Red Flags you should know.
Some Financial statement red flags that can signal potentially fraudulent practices are given below. The most common warning signs include:
- growing revenues without a corresponding growth in cash flows.
- a significant surge in a company’s profits or reduction in losses while competition is suffering.
- Depreciation methods and estimates of assets’ useful life are not in line with industry standards.
- Continuous cash operating losses while the profit & loss statement shows profits
- The sudden replacement of an auditor resulting in missing paperwork.
- A disproportionate increase in the amount of management compensation derived from bonuses based on short-term targets, which incentivizes fraud.
Financial Statement Fraud Detection Methods
While spotting red flags is difficult, the following methods of analysis may help,
- vertical and horizontal financial statement analysis – Vertical analysis involves taking every item in the income statement as a percentage of revenue and comparing the year-over-year trends that could be a potential flag cause of concern. A similar approach can also be applied to the balance sheet, using total assets as the comparison benchmark, to monitor significant deviations from normal activity. Horizontal analysis implements a similar approach, whereby rather than having an account serve as the point of reference, financial information is represented as a percentage of the base years’ figures.
- Comparative ratio analysis likewise helps analysts and auditors spot accounting irregularities. By analyzing ratios, information regarding day’s sales in receivables, leverage multiples, and other vital metrics can be determined and analyzed for inconsistencies.
In this short course on financial statements and understanding creative accounting, we will take you through
- What exactly is financial statements fraud,
- Why financial statement frauds are conducted,
- Who commits Financial statement Fraud?
- How they are committed – Some general categories,
- How to detect if there is any fraud in financial statements using analytical methods.
What you should not and will not learn in this course.
– Please do not try to learn how to carry out financial statement fraud.
– Analytical methods only show symptoms of fraud, there is no guarantee to detect all. Users and auditors need to dig deeper into financial statement details to uncover any financial statement fraud.
What you will learn in this course on financial frauds?
What are Financial frauds?
Who commits financial fraud
how they commit financial statement frauds
how to detect such frauds by using analytical methods
Author of this course is Mr Manish Gupta, a passionate hotelier and finance expert
Other courses taught by Mr Manish are