Financial Statement Analysis
Indicators of Fraud
There are a few red flags regarding the possibility of financial statement fraud. One way to detect
embezzlement would be if the current ratio were to decrease and liability concealment would
cause it to appear more favorable. The Alpha Company saw a decrease in their current ratio as
well as a 50% spike in their stockholder’s equity, this could potentially be a sign of fraud. The
Omega Company saw 100% increase in their revenue, 112% increase in their accounts
receivable, and 111% increase in gross profit which makes me suspicious of how they managed a
more favorable outcome in only one year.
Nonfinancial Metrics
Nonfinancial metrics provides valuable analytical information that supplements the data
found in financial statements (Kranacher, M., & Riley, R., 2019). NFM’s provide an alternative
to the data found in financial statements because if fraud is detected, the statement information
may have been manipulated and can no longer be trusted. NFM’s also give insight into what the
numbers on the paper mean. For instance, knowing the business has a retail store and where it’s
located could be helpful information because if it is in an area that is known for inclement
weather, it would explain why there would be lower sales than a different location. Knowing
how many employees and stores there are would give you insight into the expenses expected.
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