Financial statements issued by companies, government entities or organizations can be invaluable tools in fraud deterrence. But too often, the people in charge don’t bother to read these statements on a regular basis, and those who do often don’t understand what they are reading.
Understanding your financial statements, and knowing what to look for, are important components both in fraud identification and fraud deterrence.
“The only time officials in most companies, government entities or organizations 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 often have red flags that can alert you to potential fraudulent activity.”
A full forensic accounting analysis of your financial statements can identify the warning signs of fraud, Anderson said. There are many things to consider in analyzing the statement, he said.
Say business is booming. Do your financial statements show 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.
Say business isn’t booming and your sales, understandably, are down. If your financial statement is showing an increase in inventory purchases, something may be wrong. Could someone be fraudulently diverting inventory?
If your gross margins — the difference between sales and cost of sales or cost of goods sold — are decreasing, find out 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 may warrant a fraud investigation to ferret out 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 lets employees know that you care about the company, government entity or organization, and that you are following 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.
