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Forensic Accounting, Forensic Techniques, and Fraud Detection Copyrighted 2001 D. Larry Crumbley, ... - page 185 / 352

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© D.L. Crumbley

Do the Sniff Test – This one’s subjective, but it’s powerful. Essentially, if something looks wrong, and management can’t provide a convincing explanation, it probably is wrong. Trust your gut.

Remember that Cash is Always King – Does accounting gobbledygook make your head spin? Fear not – there is one very simple thing you can do: Keep an eye on cash flow. Over time, increases in a company’s cash flow from operations should roughly track increases in net income.

If you see cash from operations decline even as net income keeps marching upward – or if cash from operations increases much more slowly than net income – watch out.

Source: Pat Dorsey, “Five Tips for Spotting Financial Fakery,” Yahoo! Finance, February 11, 2004.

Spotting Financial Fakery

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