Chapter 5
The Accruals
Generally, when reviewing accruals in financial statements, one considers accounts such as accounts payable, accrued expenses, and future tax liabilities. Yet, accruals also include non-cash assets such as accounts receivable, accrued interest receivable, deferred tax assets, and intangibles and goodwill, not to mention accruals subject to estimations by management, such as allowance for uncollectible accounts and reserves for warranty expenses and inventory. Accruals provide information linking business activities unrelated to cash transactions, such as revenues based on credit, or future costs incurred by the company, such as accrued payroll and accrued payroll taxes. From the financial forensic examiner's viewpoint, accruals provide a playing field for potential financial manipulation and earnings management. Many of the accruals are skewed toward management's assumptions and estimates and, accordingly, create possible bias from management in accounting for these items. This chapter provides three different perspectives in analyzing accruals, hence adding three different analytical techniques to the financial forensic examiner's toolbox.
Remember that in the previous chapter the TATA index measures the ratio of total accruals to total assets for each year, and the indexes should remain rather stable. Also noted in that chapter is that when TATA is positive, there are high levels of accruals relative to assets, indicating a possibility of earnings manipulation. ...
