Formulas for detection

Analysis ratios for detecting financial statement fraud

By Cynthia Harrington, Associate Member, CFA

Messod Daniel Beneish, Ph.D., Indiana University accounting professor, has devised analysis ratios for identifying possible financial statement frauds. 

Detection of financial statement fraud is on the front burner. With billions of losses behind us from such companies as Enron, Tyco, and WorldCom, the numbers of cases has slowed but not stopped. Catching the deeds early is important because the average financial statement fraud costs businesses an average of $1 million, according to the ACFE's 2004 Report to the Nation. Analysis ratios tested by an Indiana University professor show promise in identifying possible infractions and helping CFEs focus their efforts once retained to look into suspicions. Although the study is now six years old, it appears to be increasingly used to help detect signs of financial manipulations.

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