Formulas for detection: Analysis ratios for detecting financial statement fraud

Messod Daniel Beneish, Ph.D., Indiana University accounting professor, has devised analysis ratios for identifying possible financial statement frauds. 

Detection of financial statement fraud is on the front burner. With billions of losses behind us from such companies as Enron, Tyco, and WorldCom, the numbers of cases has slowed but not stopped. Catching the deeds early is important because the average financial statement fraud costs businesses an average of $1 million, according to the ACFE's 2004 Report to the Nation. Analysis ratios tested by an Indiana University professor show promise in identifying possible infractions and helping CFEs focus their efforts once retained to look into suspicions. Although the study is now six years old, it appears to be increasingly used to help detect signs of financial manipulations.

Finding financial statement frauds
Financial statement fraud causes the biggest losses. While the median loss reported in 2004 dropped dramatically from the numbers in 2002, the potential for sizable losses didn't diminish. One in six 2004 cases cut profits by $10 million and three of the cases cost companies $50 million. The improved control environment under Sarbanes-Oxley will certainly affect the numbers going forward. But of the three types of fraud, financial statement fraud will likely always rank number one in losses.