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Using Analytics to Detect Possible Fraud: Tools and Techniques by Pamela S. Mantone

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Chapter 3

The Importance of Cash Flows and Cash Flow Statements

According to the background information for each of the four companies, cash flow statements were not part of the financial statements for Company 2 and not even prepared for Company 1. Cash flow statements are not required for governmental funds, only for the proprietary and business-type governmental entities. When these statements are missing, important information relating to a company's operations is also missing. More notably, these statements provide invaluable information to the financial forensic examiner, including the discovery of possible incentives to commit fraud, either in desperate attempts to conceal losses or in hiding possible theft of company funds. Either motive requires the manipulation of the cash flow statement.

Statement of Cash Flows, Topic AU 230 of the Codification of Financial Accounting Standards from the Financial Accounting Standards Board (FASB), provides guidance relating to cash flow statements and the prerequisites for the information required in the statement. Fundamentally, the cash flow statement is a “sources and uses” report of the company's cash, since the income statement includes accruals that obscure cash transactions unless the financial statements are prepared on a cash basis, which is not normally found in a company's prepared financial statements. For the financial forensic examiner, it is important to understand the mechanics of the statement and the relevance in its ...

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