Financial statement manipulation by directors is an ongoing problem amounting to billions of dollars

What is financial statement manipulation? Financial statement manipulation is the fraudulent practice of altering the financial records of a company to paint a false picture of its financial health. Despite the many steps taken by legislative and regulatory bodies, financial statement manipulation continues to spread especially in publicly traded companies. How does financial statement manipulation occur? Financial statement manipulation involves two things: inflating apparent revenues or manipulating them to show reduced liabilities or expenses. Common tricks used by directors to create a false picture of a company’s financial status include: • Recording revenues before the supply of goods or services
• Reporting as a business revenue income obtained from capital or investments from loans
• Posting inaccurate liabilities – or failing to report them altogether
• Shifting business expenses from the income statement to the balance sheet. One surprisingly simple way of financial statement manipulation involves inflating a company’s assets using fake inventory count values. Your directors may perform an inventory count and add more items to each category. For example, they may decide to add 100 items to each category inflating your assets by hundreds or even millions of dollars. Red flags If you’re keen, you can spot financial statements manipulation by looking out for the following red flags: Accounting anomalies, such as growth in revenues but without a corresponding growth in cash flows. Trajectory sales growth when competitors are struggling. The sudden replacement of an auditor led to the mysterious disappearance of crucial records. Weak internal corporate governance increases the possibility of fraudulent financial statement reporting A surge in your company’s performance when the last reporting period of a financial year. What shareholders can do Laws are in place to ensure companies report their financial status truthfully to protect the interests of shareholders and investors. But these protections may not b e enough to curb financial statement fraud. Shareholders need to review a company’s financial statements regularly and earn how to spot the red flags. This can go a long way to stop bad actors from trying to conceal fraudulent practices such as covering losses or laundering money. For more information, please contact us today. Spotting red flags can be difficult, but there are plenty of options to help shareholders against possible fraud. These tips can help you detect financial statements fraud: Vertical analysis: Take every item in the income statement as a percentage of revenue and compare its year-to-year trends. Do the same to the balance sheet and use total assets as the benchmark to monitor significant deviations over time. Comparative ratio analysis: Compare a day’s sales in leverage multiples, receivables, and other metrics to spot inconsistencies. Use the Beneish model: Helps you to evaluate up eight ratios to determine the chances of financial statement manipulations. The ratios include asset quality gross margin deprecation and leverage. Fareya is an arbitration and dispute resolution lawyer practicing in the United Arab Emirates since 2010. She is the founder of Fareya Azfar & Araoui LLP, a dispute resolution and venture capital law firm. Earned recognition for her talents very early in her career. Gulf Business Magazine included her in its 30 under 30 List of GCC's Top Young Achievers When interviewed by the Oath, a leading magazine for Corporates, she was titled 'The Young Bold & Dynamic'. You can follow Fareya on her blog.