Suspect a problem? Follow the cash!
While reading about the Satyam fraud it still surprises me that it is so easy to cheat the auditors, even though they have a great tool right at hand for sniffing out problems: cash.
Cash flow is an excellent way to detect whether the financial accounts and results look plausible.
And this fact can be used not just by external auditors but also by the CFO and controllers internally.
If a subsidiary’s operations are profitable, they will generate cash, and this cash flow will leave a trail that can be followed.
If the profits are fictitious there will either not be any cash flow trail, or it will also have to be made up. This is, however, much harder as it is easy to verify it by looking at the bank account balances or other financial assets and liabilities.
If you cannot find the cash there you have a good reason to be suspicious and you should check the subsidiary’s financial results once more.
Declining or diverging cash flows from a subsidiary can also be a first good indication that there is something wrong there that should be investigated.
The whereabouts of cash is easy to check, whether it is claimed to be in a bank account or on deposit, or whether it has been used to pay back debt.
And it is especially easy to do if you have already centralised your cash operations.
By centralising all cash, bank accounts and payment processes you not only lower our working capital requirements, but you also create a great fraud detection tool.
Detection of fraud committed by the management is the job of the auditors, but detection of subsidiaries hiding the truth and fixing the numbers is the job of the CFO and the controllers.
And they have all the tools they need at hand – if they would only use them.
