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10 ways to identify fraud in business financial statements

June 11, 2018 8:34 am

Financial statement fraud involves intentionally overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses.

When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices.

These red flags include the following:

  1. Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered
  2. Unusually high revenues and low expenses at period end that can’t be attributed to seasonality
  3. Growth in inventory that doesn’t match growth in sales
  4. Improper capitalization of expenses in excess of industry norms
  5. Reported earnings that are positive and growing but operating cash flow that’s declining
  6. Growth in revenues that’s far greater than growth in other companies in the same industry or peer group
  7. Sudden increases in gross margin or cash flow as compared with the company’s prior performance and with industry averages
  8. Unusual increases in the book value of assets, such as inventory and receivables
  9. Invoices that go unrecorded in the company’s financial books
  10. Loans to executives or other related parties that are written off

A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.

This articles was first published by Dummies

Author: Staff Writer

10 ways to identify fraud in business financial statements Reviewed by on . Financial statement fraud involves intentionally overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensi Financial statement fraud involves intentionally overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensi Rating: 0
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