How To Find Falsified Financial Statements
Many companies try to inflate their profit figures. Hence it becomes very important on the part of the investor to find whether the company is falsifying its financial statements. This is because most investment decisions are taken only on the basis of analyzing financial statements to ascertain whether the company is financially strong. About returns of an investment option, investors can easily find online reviews. For example, for investing in cryptocurrency various reviews like bitcoin loophole full review is available on the internet. But only people with good accounting knowledge will be able to find whether a company is financially sound and would serve as a good investment option. The following aspects are indicators of falsified financial statements:
- When the financial statement shows high growth in revenue without corresponding growth in cash flow.
- When the company shows excellent sales figures, even during a dull period when peer companies are not performing good.
- The high increase in Receivables and inventory. This parallel increase is an alert that the company is creating a fictitious sale of obsolete inventory.
- A quick increase in sales and profits during the final month of financial reporting shows that the company is trying to make up the figures so that it looks like target achievement.
- A large number of fixed assets in the financial statements indicate that too much amount is locked up in assets and the liquidity is very poor. This is a danger alert since such situations can soon lead to liquidation.
- A high rate of depreciation which is very high when compared with the peer companies.
- Frequent replacement of auditors is a bad signal. It shows that something is not correct in the financial standards of the company.
The proper conduct of a company depends on a good management and effective internal control systems. Always check the credibility of the directors before investing in a company’s shares. Check whether there are independent directors on the board. Check whether there is a good internal system for whistleblowing. To avoid frauds arising out of inflated financial statements, in many countries, the furnishing of certain data is mandatory to government and the investors as well. Though these steps serve towards investor protection, it is good to develop market knowledge. Certain skills like learning financial management ratios will certainly help the investor to identify misrepresentation in financial statements. In all countries, the legal system enforces a penalty for misrepresentation of financial data.