How to identify financial fraud


Financial fraud is a global issue and it's getting worse says PwC | Wealth  Professional

Want to identify the financial fraud of enterprises, the key is also two ideas: one is to find clues, the other is the mutual verification of evidence. Step 1: Find clues. Important clues often appear in places that feel "wrong" or abnormal. The common method is to calculate the financial indicators of important dimensions of the enterprise, and then see which indicators are significantly different from the industry average, or whether there is an inherent contradiction between the indicators. These are "red signals" and important clues. Once you find a clue, check it with other information. Any characteristics and changes in financial data need to be supported accordingly in non-financial data. If the two are consistent, it increases the probability that the enterprise will report the business situation honestly; if not, it may indicate that the enterprise may have financial fraud. Financial indicators that differ from peers are only a clue and do not show a problem, but if combined with business sense, it will find an important doubt. Selling on credit is a means of promoting sales. If there were two similar companies, one allowed to take delivery and pay later, and the other had to pay and deliver, the investor would choose the first. And if a company's accounts receivable is the lowest in the industry, it indicates that in the sales, mainly use the "money and goods" way, do not allow customers to owe money. This is against common business sense. Because generally speaking, the longer the credit period is, the later the customer can pay, the better it is to promote sales. But this company has the most demanding sales conditions. It does not like to sell on credit, and even if it sells on credit, it requires customers to pay up in the short term. The fact that the company was No. 1 in sales despite these tough sales conditions was an important anomaly.

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Step 2: Find the relationship between the evidence. Because fictitious economic business fraud is management fraud and systematic fraud, it is often difficult to obtain key evidence from the inside of the issuer, so it is necessary to turn our attention to the outside of the issuer, such as banks, customs, customers and suppliers, and focus on the authenticity of capital flow, the authenticity of transactions and other aspects of the evidence from them. In view of the question of customs declaration form, you can consult the customs to verify the situation of declaration form number, so as to get the answer that the declaration form number of different years is impossible to be consistent. In order to verify the authenticity of its fund flow, it can go to the bank to obtain the bank statement, and compare the bank statement obtained from the bank with the issuer's bank journal. If it is found that the issuer not only overcounts the bank deposit, Also found that the issuer has tamper with the bank receipt and payment voucher to conceal the true source and whereabouts of funds, then it shows that the issuer uses fictitious economic business way of financial fraud.



Conclusion: Identifying financial fraud involves two important steps: first, refining financial clues, that is, by calculating the main financial ratios and comparing them with the ones mentioned before, to find out the anomalies; Secondly, with financial clues and non-financial information to verify each other, we can find whether there is financial fraud in the enterprise.