Numbers don't lie, but those who write them do. When you put your money into a company, you are not buying its results; you are buying the honesty of those who prepared its financial statements.

Methods: Five Ways Financial Fraud Occurs

1. Fictitious Sales
2. Recording non-existent transactions or inflating their value.
3. Expense Manipulation
4. Manipulating the timing of expenses and costs across different reporting periods.
5. Asset Valuation Inflation
6. Overstating the value of assets above their actual worth.
7. Concealment of Liabilities
8. Hiding or delaying the recognition of certain liabilities.
9. Inappropriate Disclosures
10. Withholding material information or misleading the reader.

Red Flags: 14 Signs That Reveal It

1. Unusually high sales compared to the market and competitors.
2. Sales growth that does not align with cash flow growth.
3. Simultaneous increase in accounts receivable and inventory levels.
4. Excessive reliance on credit sales.
5. High rates of sales returns and invoice cancellations.
6. Unrealistic spikes in fourth-quarter earnings every year.
7. Unchanging profit margins despite changing industry conditions.
8. Unreasonably high increases in fixed asset valuations.
9. Depreciation calculations that do not align with industry standards.
10. Weak corporate governance.
11. Weak internal controls.
12. Related-party transactions and conflicts of interest.
13. Frequent changes of external auditors without a logical reason.
14. Executive compensation packages that do not align with performance.

Do not look for the beautiful number; look for the number that stands up to scrutiny.

Mohamed Bin Saleh

Interested in Management and Finance