Financial statements issued by companies, government entities or organizations – when reviewed on a regular basis – can help in fraud deterrence. In many situations, though, executive officers rarely check these statements and, in cases where they do, they often do not understand what they are reading.
Knowing your financial statements, and understanding what to look for, are important components both in fraud identification and fraud deterrence.
“The only time officials in most organizations, government entities and companies actually look at the financial statements is after year-end,” said David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including fraud investigation and fraud deterrence programs. “They are doing themselves a major disservice. Financial statements can have red flags that can alert you to potential fraudulent activity.”
A full forensic accounting analysis of your financial statements can help point out the warning signs of fraud, Anderson said. There are a number of things to consider in analyzing the statement, he said.
If your business is growing, do your financial statements indicate regular increases in sales or do they show relatively flat sales? If it’s the latter, you’ll want to know why. In one recent fraud case, a dishonest employee was diverting sales and cash receipts. Had the business owner checked the company’s financial statements regularly, the fraud could have been detected sooner, Anderson noted.
If your business is not growing and sales are down and your financial statement is showing an increase in inventory purchases, there may be an issue. Someone could be fraudulently diverting inventory.
If the difference between your sales and the cost of sales or cost of goods sold – also known as your gross margins – are decreasing, there could be a reason why. If certain operating expenses — such as office supplies/expense, travel and entertainment expense, etc. — are rising faster than expected, look into it. If the cash balance on your financial statements doesn’t approximately equal the balances on the corresponding bank statements (allowing for some outstanding checks), look for missing funds.
The reason behind any of these “red flags” may be completely legitimate, Anderson said, but they also indicate a fraud investigation to find illicit activity. At the very least, a consistent examination of your financial statements may identify business inefficiencies that can be resolved.
Lastly, regular financial statement analysis shows your workers you care about the company, government entity or organization, and that you are watching the flow of money to assure operating efficiency and to identify potential fraud. It’s one of the strongest fraud deterrence messages you can send, Anderson advises.
If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.
