Formulas for detection: ratio alerts to financial statement fraud

A few years ago Messod Daniel Beneish, Ph.D., accounting professor at Indiana University in the United States, devised a series of analysis ratios to identify possible financial statement fraud. Cynthia Harrington reviews his toolkit.

This is a version of an article that first appeared in the March/April 2005 edition of Fraud Magazine, the publication of the Association of Certified Fraud Examiners (ACFE, www.cfenet.com).

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 financial statement fraud costs businesses an average of US$1 million, according to the Association of Certified Fraud Examiners’ 2004 Report to the Nation.