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Nine indicators to help you identify fraud in your business

by , 28 September 2015
Financial statement fraud is when your financial manager intentionally overstates or understates assets, revenues, and profits.

You might have suspected management doing this in a desperate attempt to meet company goals and objectives to meet investors' expectations.

But instead this will actually cripple your business and you could be the one that ends up in jail!
So, today I'm giving you nine indicators to help you identify fraud in your business.

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The following nine ratios/comparisons will help you identify any fraud:

• Current Ratio – Current Assets/Current Liabilities

- Measures a company's ability to meet present obligations; and
- The number of times that current assets exceed current liabilities is a quick measure of financial strength.
• Quick Ratio – Cash + Securities + Receivable/ Current Liabilities (Acid-Test Ratio)

- Measures the company's ability to meet sudden cash requirements/measure of Liquidity; and
- Provides an analyst with worst-case scenario of a company's working capital situation.
• Receivable Turnover – Net Sales on Account/Average Net Receivables

- Measures the number of times accounts receivable's turned over during the accounting period; and
-Measures the time between on-account sales and collection of funds.
• Collection Ratio – 365/Receivable Turnover

- Accounts receivable aging's measured by the collection ratio; and
- The lower the collection ratio, the faster receivables are collected.

Read on for another five indicators to help you identify fraud in your business


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• Inventory Turnover – Cost of Goods Sold/Average Inventory

- Measures the number of times inventory's sold during the period; and
- The higher the inventory turnover ratio, the more favourable it is.
• Average number of day's inventory is in stock – 365/Inventory Turnover

- This is a restatement of the Inventory Turnover ratio expressed in days; and
- An increase in the number of days inventory stays in stock can cause more expenses, storage costs, etc. and could also indicate possible larceny and purchasing and receiving schemes.
• Debt to Equity Ratio – Total Liabilities/Total Equity

- This ratio's viewed carefully by lending institutions because it gives a view on the risks borne by the creditors and owners; and
- The higher the ratio, the more difficult it'll be for you to raise capital by increasing long-term debt.
• Profit Margin – Net Income/Net Sales (Efficiency Ratio)

- This ratio reveals profits earned per Rand of Sales; and
- As fraud's perpetrated, net income will be largely overstated and the profit margin will be unusually high. Where false expenses and fraudulent disbursements are created, this'll cause an increase in expenses and a decrease in the profit margin ratio.
• Asset Turnover – Net Sales/Average Assets

- This ratio's used to determine the efficiency with which asset resources are used; and
- Where assets are used more in one year than the next with no apparent explanation, you must look at both the Financial Statements and source documents.

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