Question

Do you believe that statement of Cash Flows can be analyzed to uncover financial fraud or it can be used to cover financial fraud? , Indicate if there has been any other cases in support of your opinion.

Answer 1

Statement of Cash Flows : Yes statement of cash flows can be analysed to uncover financial fraud. Statement of cash flows is also known as statement of cash flows. It has the information that how much cash is generated and used during a given time period. It is very hard to find the manipulation in inflow and outflow of money in cash flow statements and we cannot easily detect and prevent the fraud in cash flow statement than other forms of manipulation.

Cash flow statement are not easy to change like other balance sheet and income statements. because manipulations made in balance sheets are either directly or indirectly connected with the manipulations of revenues and expenses in balance sheets and with the cash flow in cash flow statements.

A cash flow statement is a regular annual set of financial statements in the practice of regular financial reporting.This statement gives an insight into a company’s performance from a perspective completely different from balance sheets and income statements, by giving very detailed information on an inflow and an outflow within its business, financial and investing activities. By this way, cash flow statements function as the estimate of a company’s exposure to financial risks.

Generally, there are two basic methods to manipulate operational activities in cash flow statements:

->Maximizing the inflow of money from operating activities

->Minimizing the outflow of money from operating activities

Case which support to above opinion :

The best example for committing financial fraud is Enron.

Many methods that were utilized in order to improve the appearance of its financial statements.

Enron's financial statements were confusing to shareholders and analysts.In addition to its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.

Conclusion : It is easy to change and manipulate the balance sheet and other income statements.but cash flow statement cannot be changed easily. Many frauds in the previous period have led to the emergence of a large number of financial scandals which were the result of false financial reporting, which has led to a stricter and more detailed control of financial information.

Cash flow manipulations are much harder to commit, but also much harder to detect and prevent. The problem is that such manipulations are performed with real cash flows, unlike revenues and expenses yet to be collected. That is precisely the reason why manipulations with an inflow and an outflow are what only „experienced” fraudsters carry out. Practice has shown that perpetrators of these manipulations very skillfully conceal their traces and that the techniques used for committing them very often border with legal methods for showing the cash flows of a company.