Forensic Accounting For Dummies by Frimette Kass-Shraibman

Author:Frimette Kass-Shraibman
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-01-04T00:00:00+00:00

Chapter 13

Tracing the Flow of Money

In this Chapter

Studying a company’s financials

Getting intimate with bank records, 1099s, and credit card statements

Interviewing key witnesses

Looking at your target’s lifestyle

Within a business, cash can be manipulated in two ways: It can either be misappropriated or “created” in a company’s financial statements. The first type of fraud occurs when employees or managers steal cash from a company. Small businesses are more susceptible to defalcation (misappropriation) of cash because they have fewer internal controls in place to detect the fraud. In large businesses, management can override the controls to perpetrate fraud.

The second type of fraud is rare and extremely difficult to carry out. The assumption here is that the cash and bank balances reported in the company’s financial statements are fake. To carry this out, someone has to artificially inflate the revenues first.

This type of financial statement fraud occurred in one of the largest corporate frauds in history involving Parmalat, a multinational Italian dairy and food company. Parmalat’s management fabricated invoices to inflate revenues and then “created” cash to make the inflated revenues seem genuine. Management also forged a bank confirmation showing a balance of $4.9 billion. This type of fraud is difficult to pull off without getting caught because cash is cash, and it’s virtually impossible to “create” cash without raising some obvious red flags.

As a result of this fraud, Parmalat was forced to declare bankruptcy at the end of 2003. It was estimated that a billion Euros were missing. That’s a lot of cheese!!

When investigating occupational fraud (and other types as well), following the money trail is essential. In this chapter, we discuss the methods you use to trace the money so you not only detect fraud, but also build a case to bring the perpetrators to justice.

Identifying Potential Red Flags

There are many red flags for missing money, and many of them dovetail with the general signs and symptoms of fraud. We focus here on occupational fraud (the subject of Part II of this book) and review some of the signs of missing cash that can be found on a company’s financial statements.

Analyzing financial statement basics

As we discuss in Chapter 5, financial statements are a picture of a company’s financial condition and a record of business for a certain period of time. One quick way to determine if cash is a problem (for example, it’s disappearing) is to compare the company’s revenues, accounts receivable, and cash flows.

In a properly functioning business, accounts receivable should grow with sales, and revenues and cash flows should be closely correlated. If sales are staying the same, and accounts receivable are up, you have to ask why. It’s possible that there are collection problems or that someone is stealing cash. If sales are up, accounts receivable down, and cash flows steady, you might ask, “Where’s the money?” In short: If business is up, the company should have more money. If the financial statements don’t show more money, ask why. Maybe the business

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