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Financial Statement Fraud: Strategies for Detection and Investigation by Gerard M. Zack

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Appendix

Financial Statement Fraud Indicators

WHEN FINANCIAL STATEMENT fraud takes place, it virtually always leaves a trail. The fraud indicators listed in this appendix represent characteristics that are often present when financial statement fraud occurs. Just like other red flags, their presence is not a guarantee that fraud is occurring. There are many reasons for their occurrence that have nothing to do with fraud. However, when fraud is occurring, these may be some of the signs that are observed. When these indicators are present, an explanation should be obtained in an attempt to rule out financial statement fraud. If fraud cannot be ruled out, keep investigating!

The indicators are organized by broad category of financial statement fraud—revenue-based schemes, asset-based schemes, and expense/liability based schemes. Since many of the indicators could be consistent with a variety of schemes in each category, further investigation will be necessary to narrow the list of possible frauds down to a more manageable quantity

Revenue-Based Schemes

  • Cash flows from operations are negative or lag significantly behind reported net income.
  • Rapid growth in sales in comparison with competitors or in light of current economic conditions.
  • Growth in revenue from one location or division is unusually high in comparison with other locations or divisions.
  • Unexplained increases in sales to specific customers.
  • Changes in revenue recognition policies allowing for earlier recognition.
  • Unexplained ...

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