ACCOUNTING FRAUDS AND HOW YOU CAN DETECT THEM / SOME TIPS

REVENUE MANIPULATION

Change in operating cash flow as a percentage of EBITDA

If this ratio is deteriorating over time, then it raises concerns over the company’s revenue recognition

policy.

Change in other income as percentage of investments

If there is a significant reduction in the yield over time, then it raises concerns over the company’s
revenue recognition policy, as some part of the other income might have been booked as revenues

thereby resulting in higher revenue growth.

EXPENSE MANIPULATION
Change in depreciation rates

If there is a significant change in the depreciation rate over time then it raises concerns regarding

manipulation of expenses to boost profitability.

Change in other expenses as percentage of revenues

If this ratio is deteriorating over time then it raises concerns over the company using “low visibility
line items” to massage earnings and extract cash from the company’s books

CASH MANIPULATION
Loans and advances as percentage of net worth

If this ratio is high then it raises concerns about the company’s cash management policy, as some
portion of cash may be taken out of the company by lending it to seemingly unrelated companies.

Loans and advances to related parties as percentage of net worth

If this ratio is high then it raises concerns over the company’s cash management, as cash from the
company’s books might have been taken out to fund the directors’ personal business endeavors.