Professor Elam

Using Cash Flow Statement to Spot Fraud

Tuesday April 5 2022

Using the Statement of Cash Flows to Spot Fraud   Fraud studies show that cash is the most frequently stolen business asset. For example, cash on hand or cash receipts may be taken directly by employees. Or cash may be misappropriated indirectly through fraudulent disbursements, such as payroll, billing, expense reimbursement and check tampering schemes. A company’s statement of cash flows shows how cash changed during the year, and it can be analyzed to help detect fraud and financial misstatement scams. Forensic accountants generally look for amounts that seem unreasonable. They also look for increases or decreases in accounts that seem to contradict trends in operating cash flows or other financial information.   Focus on Cash From Operations   The statement of cash flows is typically broken down into three categories: 1) cash from operations, 2) cash from investing activities, and 3) cash from financing activities. Forensic accountants often apply ratio analysis to detect unusual changes in cash from operations that might indicate fraud. Examples of amounts to compare to cash from operations include:  Changes in revenue and income from operations, Changes in working capital accounts, Asset purchases, Dividends paid, Current and long-term debt payments, and New loan proceeds.  If a company reports an increase in cash flow from operations, it’s unlikely to borrow money or seek additional capital from owners. Instead, it’s more likely to repay debt or pay dividends. Monitor Related Accounts  Certain accounts tend to have stable relationships over time. That is, an increase in one account generally brings a similar increase in a related account. For example, in many companies, there’s a predictable relationship between: Revenue, accounts receivable and inventory, Inventory and accounts payable, and Fixed assets and depreciation expense. To illustrate, if ABC Company reports a significant increase in revenue in 2021, you’d expect to see a proportionate increase in receivables. Likewise, the company may need to carry more inventory to meet increased customer demand. If the statement of cash flows reveals a decrease in either account, it could indicate that the company is reporting fictitious revenue. However, there also could be a reasonable explanation. In this hypothetical case, ABC Company hired a CFO in January who focused on improving collections and implementing a just-in-time inventory program that significantly reduced the company’s investment in working capital. Not every red flag indicates fraud — but red flags do require further investigation to determine what happened and why. In some cases, red flags may indicate inefficiencies, poor business practices or erroneous accounting practices. Early detection can help mitigate losses.   Game the Statement   When a company is struggling, its statement of cash flows may show a net decrease in cash from operations. To make ends meet, the company may generate cash through bank loans, infusions of investor capital and asset sales. To avoid showing the signs of financial distress, management may artificially boost cash from operations to make the company temporarily appear healthier. For example, the company might defer payments to vendors, finance payables or transfer receivables to a variable interest entity to inflate cash from operations. These techniques may qualify as financial misstatement, if the intention is to mislead investors, lenders and other stakeholders to protect or enhance the perpetrator’s financial interests.   Consider Outside Expertise The statement of cash flows may provide relevant insight during a fraud investigation. A forensic accounting professional can help analyze this statement for potential red flags and investigate suspicious behavior and financial reporting anomalies.    theKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We can provide insight into financial reporting anomalies for you or your client. For more information, please call us at 210-340-8351.  Additional information included in this report was provided by PDI Global/Thomson Reuters  © 2021 We are proud to continue our support to the San Antonio Food Bank for the fourteenth year in a row.  January 17th  through April 18th we will be collecting canned and dry foods in our office to donate to the San Antonio Food Bank. If you would like to make a monetary donation through our Virtual Food Drive:  please click here. theKFORDgroup proudly participated in this year's Blue Santa Toy Drive  Click here to contact the Firm Copyright © 2022 theKFORDgroup, All rights reserved.   theKFORDgroup 8620 N. New Braunfels, Suite 300 San Antonio, TX  78217 (210) 340-8351 (210) 340-8359 fax http://www.theKFORDgroup.com Want to change how you receive these emails? You can update your preferences or unsubscribe from this list

 

Chegg Has an Earnings Miss

Wed Nov 3 2021

chegg drops 45% on 25x normal volume.

Gee the stock reached 115 during the pandemic, the bloom is sure off the rose now

Evergrande Explained

Monday Sept  27 2021

https://kraneshares.com/evergrande-explained/

Frothy Valuations

Monday Sept 13 2021

Andy Kessler has been warning of excessive valuations in his WSJ column for weeks. This weekend we detailed the lack of breadth  in the face o f higher averages. Here is part of his column today.

 

 

 

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Updated Sept. 12, 2021 10:24 pm ET

 

 

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A Joby Aviation aircraft outside the New York Stock Exchange during the company's initial public offering in New York, Aug. 11.

Photo: Michael Nagle/Bloomberg News

 

 

 

Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter?

I can go on. Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq. I live at the intersection of innovation and disruption, but when companies are worth more than any possible reality, watch out.

How about those meme stocks still getting hyped on Reddit’s WallStreetBets? Those who bid GameStop shares into the stratosphere waved at Virgin Galactic Holdings as they soared by. A year ago, the stock was $6 and it is now $190—some dupes paid $483, game over. Short sellers Melvin Capital, Point 72 and D1 Capital focused on fundamentals and got their assets handed to them. Shorts lost more than $9 billion between January and June.

New Chairman Ryan Cohen, who is driving change at GameStop, may be a retail genius for turning around Chewy, but Redditors may want to put in a call to hedge-fund manager Eddie Lampert, who bought Kmart and merged it with Sears in 2005, as a highly touted “integrated retail” play, combining stores and online sales, eerily similar to the argument for investing in GameStop today. The stock peaked at $135 in 2007. It is now at $0.30 as the company languishes in bankruptcy. A 1970s Sears Johnny Miller leisure suit is worth more.

Do You Understand Payer Spreads?

Monday ajugust 23, 2027

Here is an article from finance.yahoo.com. I recommend reading lots of financial lilnks, see  this weblog and Helpful Websites to gain a better

understanding of accounting and finance. Here is a good example, do you know what citi is recommending?

Bloomberg) -- Citigroup Global Markets says Treasury yields are set to rise, and there’s a way to screen out one of the main risk factors that may push them lower by betting against the yuan.

The U.S. brokerage recommends its clients position for higher U.S. rates and also use options to wager against any strength in China’s currency. The rationale is that a slowdown in Chinese economic growth that would drag down Treasury yields, will also cause the dollar to appreciate versus the yuan.

“While the near-term picture is murky, our conviction on the broader macro picture is supportive of higher” U.S. 10-year yields, Citigroup strategist Jabaz Mathai in New York wrote in a client note. “Given that China weakness is a macro risk for rates, we reduce the premium by selling short-dated out-of-the-money puts on USD/CNH.”

 

Mathai says the outlook for Treasuries over the next couple of weeks is hard to call, but over the longer term a rebound in economic growth and Federal Reserve tapering will see benchmark 10-year yields climb to 2% by the end of 2021.

Citigroup recommends initiating a short position in Treasuries through buying a structure known as payer spreads on 10-year swap rates, with a six-month expiry, aiming for rates to rise by 25 to 50 basis points. Investors should simultaneously sell three-month puts on USD/CNH struck at 6.40.

Treasury 10-year yields were at 1.27% on Monday and the offshore yuan was at 6.4958 per dollar.

Accounting Update

Tuesday June 22, 2021

One of my twelve recommendations in Conquer Accounting is that students should subscribe to the Wall Street Journal. A student subscription is only a dollar a week.

Accounting students will greatly increase their understanding of business context. Here are some examples from today's WSJ.

 

Auditors See Improved Conditions

 

of 5,891 companies audited last year 18.8% received a goinjg concern warning .  Companies included Hertz, Dave and Buster's, and Norwegian Cruise Line.  Hertz took  BK the other two dide not.

 

Ex Trader Sentenced in Spoof Crackdown

A Deutsche Bank futures trader was convicted of manipulating gold and silver prices and sentenced to one year and a day in prison. Spoofing involves sending and then cancelling orders to manipulate the3 market for one's own gain. His lawyers calimed that bluffinga nd misdirection wer commonplace tactics at the time. The Judge did not buy that story.

 

Lordstown Official Sold Shares Ahead of Financial Report. 

Lordstown has yet to sell an electric truck so not surprising they are not making any money;. But executives sold shares for millions of dollars prio to reporetin a net loss of 23 cents a share for the quarter. This is known as insider trading.

 

Goldman Rebuffed on Bar for Fraud Suits

The US Supreme Court rejected Goldman's request to raise the bar (amount)for shareholder lawsuits alleging fraud on GS part. The lawsuit claimed GS had inflated its share price in  2007-2009 by claiming it compiled with ethical rules when in fact  it had undisclosed conflicts of interest in selling mortgage backed securities.

Now here is the funny part.

"Our clients interests always come first and our reputation is one of our most important assets," said the firm.

Read about it at hthis link

 

As for GS stellar reputation read about their recent fine of $2 billion in Malaysia

 

 

SEC Replaces PCAOB

Weekend June 5, 2021

The ew head of trhe SEC removed all members of hrte PCAOB.

Sanders and Warren had urged their removal. Perhaps the PCAOB will do something about all the problem they find in Big  4 audits.

What is Coinbase Really Worth?

Wed April 14 2021

One analyst says more like five rather than 100 B

GE Stock falls on /r/everse Split and $30 B Deal

Wednesday March 10, 2021

GE stock fell after announcing a $30 B Deal to sell its aircraft leasing buseinss and

a 8 - 1 reverse stock split.      The reverse split will raise the stock price by $ 8x and reduce the number of shares outstanding by 1 - 8.

 

SEC Moves for Audit Oversight on Chinese Companies

Wed Nov 18 2020

The SEC will apparently insist by year end on audit oversight of Chinese companies listed on American Exchanges.

Chinese companies like to list here and have shares traded. But they have resisted attempts to be audited by American firms.

Looks like the SEC is going to stop that practice this year, read the link above.