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Expert: Don Sadler - 10/9/2005


Question
Dear Sir
i need you opinion regarding the following
If some one has the access to the company's income statement and balance sheet then what types of analysis can one perform to determine whether fraud may be occurring in that company.

Thanks


Answer
The financial statements (Income Statement & Balance Sheet) are the primary reports.  You cannot detect fraud merely by looking at or examining these reports.  However, you can recognize relationships that may be indicative of some financial anomaly.

Fraud, of course, exists in many forms and may not even show up in financial reports.  The most typical types of enterprise fraud involves presenting the business as being more financially sound that it really is.  Two common ways of doing this are by overstating assets and/or understating liabilities.

In general, your approach would be to identify the typical financial statement ratios for the industry in question and compare them to the company about which you are suspicious.  If there is disparity in the comparison, then you have reasonable concern and should have independent auditors examine for fraud.

Here are a some interesting links for you that address fraud:

Let Them Know Someone's Watching
http://www.aicpa.org/pubs/jofa/may2002/wells.htm

How Cooking the Books Works
  http://money.howstuffworks.com/cooking-books.htm

Fraudulent Financial Reporting
  http://www.coso.org/publications/executive_summary_fraudulent_financial_reportin...

Financial Statement Fraud
  http://www.handels.gu.se/epc/archive/00002784/01/gbs%5Fthesis%5F2002%5F53.pdf  

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Don Sadler

Expertise

I can answer regarding Internal Auditing - especially operational audits, audit management, and how to revitalize a dysfunctional audit department. Also give advice to "auditees" on how to deal with auditors.

I DO NOT ANSWER HOMEWORK OR CLASS PROJECT QUESTIONS. For those answers, I suggest you scan previously asked questions and search on your favorite search engine.

I ALSO DO NOT ANSWER TAX QUESTIONS AS THIS IS NOT WITHIN MY EXPERTISE. NOTE: I am not an accounting expert although i will try to help if I can... ask at your own risk.

Experience

I have worked in the public and private business management arena with experience in OMB, Resource Management, Internal Auditing and consulting. I am a former President of the Inland Empire Chapter Institute of Internal Auditors, previously held Director positions in the Orange County Information Systems Audit and Control Association and the Northern Telecom International User's Association. I am a Certified Fraud Examiner and a Certified Information Systems Auditor.

Organizations
Institute of Internal Auditors, Association of Certified Fraud Examiners, and Information Systems Audit and Control Association (ISACA)

Education/Credentials
MBA, CISA, CFE

Founder and Principal of Applied INTEGRITY Management Consulting Group

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