Irrational Ratios Minkof

Irrational Ratios

1 of 5

http://www.journalofaccountancy.com/Issues/2001/Aug/IrrationalRatios...

FRAUD

The numbers raise a red flag.
BY JOSEPH T. WELLS
AUGUST 2001

inancial statements tell a story,” says accounting professor W. Steve Albrecht, “and the story should make sense.” If not, it’s possible the story is a fake. By standing far enough back from the numbers to get a good picture of the client’s business, auditors frequently can detect signs of financial statement frauds. Because the balance sheet, income statement and statement of cash flows are interrelated, such frauds can pop out when certain numbers don’t make sense. The inescapable logic of the accounting equation ensures that any major overstatement of assets
But the company was built entirely on Minkow’s lies. By the time he was 20, the fraud had been uncovered and Minkow was sentenced to 25 years in federal prison (he served eight years before being paroled).
BORN TO COMMIT FRAUD?
Minkow said that, although he didn’t know exactly why, he’d been committing fraud almost since the day he opened for business. In the early days, when he couldn’t meet payroll, he’d steal checks and deposit them in his bank account. He also would kite checks, overbill customers and overdraw his checking account—whatever it took to stay afloat. What made Minkow believable was his verbal ability. After three decades of meeting and dealing with white-collar criminals, I would put Minkow at the very top; he is without question one of the most persuasive crooks I have ever met.
Minkow’s early frauds had escalated to the point where, to keep from being discovered, he had to get outside financing. The first time he borrowed money, it was on the strength of inflated, unaudited financial statements and altered tax returns. When that loan came due, he borrowed from another bank using the same method. He did the same with the next bank—and the
In the ZZZZ Best case, the index of .064 is almost four times the study’s mean for nonmanipulators, another possible clue of fraud.
A FINAL WORD OF CAUTION
Fraud, by its nature, is easy to conceal and difficult to detect; an entity that manipulates its earnings only once might avoid discovery altogether. But manipulating financial statements is usually a continuous process that grows and deepens. So the indexes discussed above—along with vertical, horizontal, and ratio analyses—can give the auditor tools to help identify fraud. You should be cautioned, though, that no one irregularity is a sign of financial statement manipulation. Rather, you should carefully observe patterns over a period of time. Step back, assess the numbers, look at the big picture and see if it tells the right story.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners, Austin, Texas. Mr.
Wells’ article “So That’s Why They Call It a Pyramid Scheme” ( JofA Oct.00, page 91) has won the Lawler Award for best article in the JofA in 2000. His e-mail address is [e-mail]