Advanced Forensic Financial Analysis

By Michael F. Rosplock, CFE

Fraud examiners must hone their financial statement fraud detection methods to overtake the sophisticated crimes of corporate America.  

(This concludes an article that appeared in the September/October issue of The White Paper and is reprinted with permission from the June 2001 issue of National Association of Credit Management's Business Credit magazine.- ed.) 

Corporate fraudsters are committing more devious forms of financial statement fraud by concealing and suppressing the true worth of assets, liabilities, cash flows, sales and profitability. Fraud examiners must stay one step ahead.

Use analytical processes to detect the probability of bankruptcy or fraud:

  • Perform a subjective analysis of history and operations of the company. Obtain credit and bank reference information to determine changes in payment habits, relationship with the bank in regards to experience, savings account balances, short- and long-term credit line exposures, and bank compliance.
  • Analyze the financial condition by performing a horizontal and vertical analysis of the balance sheet and income statement. The use of industry standard
    statistics is essential in the analytical process, as a means of verifying the condition of ratios and financials in relation to standards.
  • Once the conditions of ratios and statistics have been determined, trending analysis is the next step in the analysis process. This process will assist you in detecting inconsistent patterns in the ratios and statistics, which should be regarded as a red flag.
  • The detection of trending inconsistencies requires further analysis to determine the factors that impacted the changes in condition of ratios or financial statistics. The detection of imperfections or inaccurate statistics is essential during this analytical process.
  • When analyzing the condition and trend of the income statement and balance sheet, it's important to evaluate the gross margin, operating margin, and net profit margin as a percent of sales. This will determine if the changes in condition of the income statement and balance sheet were accordant.
  • In-depth knowledge of the balance sheet, income statement, and statement of cash flow requires an understanding of how changes of consistent or inconsistent trending patterns impact the income statement and cash flow.
    Your ability to determine inconsistencies, or unexplainable changes in the income statement and balance sheet will assist you in the beginning stage of forensic financial analysis. Your ability to acquire an investigative perseverance requires an ability to analyze below the surface.

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