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