Lavneet Bansal
Audit Monk

Financial Shenanigans: Cash Flow & Key Metrics Shenanigans (Part 3)

In the previous post I mentioned the brief summary of Earnings Manipulation shenanigans.

2 min read Audit & Forensics Accounting ManipulationsFinancial Statement Fraud
Lavneet Bansal Originally published on Audit Monk

In the previous post I mentioned the brief summary of Earnings Manipulation shenanigans. Below is the summary of some methods used to manipulate cash flow & key metrics in financial statements as identified by Howard Schilit in his book Financial Shenanigans.

Cash Flow Shenanigans:
1. Shifting financing cash flow to operating section
  • Recording bogus cash flow from operations (CFFO) from a normal bank borrowing
  • Boosting CFFO by selling receivables before the collection date
2. Shifting normal operating cash outflow to the investing section
  • Inflating CFFO with boomerang transactions
  • Improperly capitalizing normal operating costs
  • Recording the purchase of inventory as an investing outflow
3. Inflating operating cash flow using acquisitions or disposals
  • Inheriting operating inflows in a normal business acquisition
  • Acquiring contracts or customers rather than developing them internally
  • Boosting CFFO by creatively structuring the sale of a business
4. Boosting operating cash flow using unsustainable activities
  • Boosting CFFO by paying vendors more slowly
  • Boosting CFFO by collecting from customers more quickly
  • Boosting CFFO by purchasing less inventory
  • Boosting CFFO with one-time benefits
Key Metrics Shenanigans:
1. Showcasing misleading metrics that overstate performance
  • Highlighting a misleading metric as a surrogate for revenue
  • Highlighting a misleading metric as a surrogate for earnings
  • Highlighting a misleading metric as a surrogate for cash flow
2. Distorting balance sheet metrics to avoid deterioration
  • Distorting accounts receivable metrics to hide revenue problems
  • Distorting inventory metrics to hide profitability problems
  • Distorting financial asset metrics to hide impairment problems
  • Distorting debt metrics to hide liquidity problems
Few red flags associated with cash flow & key metrics manipulations:
  • Disclosures about selling receivables with recourse
  • Changes in the wording of key disclosure items in the financial reports
  • Providing less disclosure than in the prior period
  • Unexpected increase in capital expenditures
  • Investing outflows that sound like a normal cost of business
  • Declining free cash flow while CFFO appears to be strong
  • New categories appearing on the statement of cash flows
  • Selling a business, but keeping the related receivables
  • Accounts payable increasing faster than cost of goods sold
  • Changing the definition of a key metric
  • Increases in receivables other than accounts receivable
  • A huge decline in debtor turnover ratio following several quarters of growing receivables
  • Stopping the reporting of certain key metrics