Accounting manipulation checklist

I have made an attempt to prepare an accounting manipulation checklist byreferringto variouswebsites and few good books like The checklist manifesto,financial shenanigans,the Number game etc. I have tried to keep it objective and to the point.Lets refine and come up with the ultimate one. Your suggestions are welcome.

As an example i have applied it to “AVANTI FEEDS”

1). 1. Is the NI adequately backed by cash?

  • Has the CFO/NI been significantly lower as compared to peers or has significantly decreased?

No (has remained mostly above 1 in past 10 years)

  • Has the accruals ratio been significantly high as compared to peers or rising? (accruals ratio = (NI-CFO-CFI)/average Net operating assets) (net operating assets = total assets-cash-marketable securities)

Not applicable (as the ratio has been negative in past 3 years.)

2). Has the CFO been either in line with historical relation or high coupled with high levels of net-working capital? (look at change in CFO, change in current liabilities and change in current assets)

No (cash has increased significantly, check for factoring)

3). Is there a significant difference between unaudited and audited financials? (quarterly and financials)

_No _

4). Has the company reported below or above average profit in last quarter, which cannot be explained by seasonality or any other factor? (quarterly reports and annual financials)

No (spike in revenue, profit, other income significant in 2nd quarter)

5). Question the long term purchase commitment. Has it been signed at inflated price or excess volume?

_Not mentioned _

6). Is there consistency in format of the report (segmental info in footnotes)?

_Yes _

7). Is there low quality control?

  • Is the internal control poor? ( internal control, independent director, independent auditor)

No (the board of directors comprise of 5 out of nine independent directors, there is an internal auditor and the external auditor seems to be independent, the audit & remuneration committee comprise of adequate no of independent directors, it set up an internal risk & compliance department headed by C.A with 15 years of exp)

  • Is the audit committee consisting of independent directors?

_Yes (except 1 _Sri C. Ramachandra Rao C.S who is the M.D and a member of the audit committee as the compliance officer)__

8). auditor and key person related

  • Has the auditor and/or lawyer and/or company secretary and/or top managers resigned abruptly?

_No _

  • Has the auditor given a qualified opinion?

_No _

  • Has the auditor listed any concerns? What are they?

_No _

9). Is the company manipulating its revenue?

  • Is the revenue recognition policy too liberal? (footnotes)

Yes (the companyâs revenue is recorded when goods are dispatched)

  • Has the cash collection ratio significantly come down compared to the past? (Cash collection ratio = (revenue- change in A/R+ change in deferred revenue) / revenue)

No (it has been close to 1 in past 3 years indicating adequate cash backing)

  • Has there been a significant increase in DOS compared to its past and its peers?

Yes (it has increased but not significantly from 7.76 in FY10 to 20.5 in FY12)

  • Has the company recorded revenue when future services are still due? (footnotes to revenue)

Not mentioned

  • Weigh the uncertainties of company using the percentage completion of method. Is the use of percentage completion proper? (footnotes to revenue)

Not applicable

  • Does the buyer have the financing to pay? (especially in case where the customer is a significant buyer) (check the buyers liquidity and solvency)

Not enough information provided

  • Is the company recognizing revenue from franchises hastily? (revenue recognition from sale of area development rights) (schedules to revenue, deferred revenue)

Not applicable

  • Has the revenue been recorded in an exchange transaction? (footnotes and schedules on revenue)

_No _

  • Does the companyâs definition of operating change frequently? (footnotes on revenue)

_No _

  • Has the bad debt and doubtful debt grown significantly as a percentage of previous years A/R?

Yes (it has gone up from 3% for FY10 to 10% from FY11)

  • Is A/R growing faster than sales?


10). Is the company manipulating its expenses?

  • Are the quarterly estimates for COGS and ending inventory proper in quarterly reports? (use the average gross margin to get an idea)

Not applicable (business environment has changed significantly in past few years)

  • Is the company using specific identification method? If yes is it applicable? (schedules of inventory and COGS)

_No _

  • Has the company been perishing older inventory by not purchasing or purchasing less? (schedules of inventory)

**No **

  • Is the company capitalizing start-up costs? (schedules assets)

_No _

  • Is the company capitalizing R&D cost? (schedules assets)

_No _

  • Is the company capitalizing advertising cost? (schedules assets)

_No _

  • Is the company capitalizing advertising cost? (schedules assets)

_No _

  • Are the provisions for default adequate? (in line with industry)

May be(because the company has been writing of bad debt which has significantly gone up for FY11 compared to FY10 and no close peers could be found for comparison)

  • Are there significant pending or imminent litigations? Has the company accrued losses for imminent litigations? (footnotes)

_No _

  • Is the company prepaying operating expenses? (footnotes current assets)

_No _

  • Has capital work in progress as a percentage of fixed assets increased significantly?

Not applicable

11). Is the company changing discretionary cost?

  • Is the company hiding losses under discontinued operations? (look at schedules of discontinued operations)

May be (the company had set up shrimp shell manufacturing plant in 2000 it has remained idle since 2007 and the company has been carrying it, it has written off the plant recently)




12). Is the company trying to smoothen its profits?

  • Is the company continuously covering weak operations by selling undervalued assets particularly at the end of the year? (major source coming from sale of assets)

_No _

  • Has the company tried to post profits through retirement of debt and replacing the same with costly ones? (long term liability schedules and CFF in cash flow statement)

_No _

  • Is the company hiding losses as non-continuing operations? (schedules of non-continuing operations)

Not applicable

13). Is company taking âbig bathâ?

  • Has the company reported significant loss on sale of assets whenever it has sold assets?

_No _

  • Have there been gains from sale of undervalued investments, including real estate?

_No _

14). Are the accounting policies too liberal?

  • Is the amortization period too lengthy? (amortization schedule)

No (6 years for software is fair enough)

  • Is the residual value unrealistic? (depreciation schedule)

No (residual values are either higher of management estimates or as prescribed)

  • Is the depreciation method appropriate? (deprecation schedule, compare with peers to get a better idea)

Yes (seems simple as it uses straight line depreciation, weâll have to go ahead considering it appropriate as no peers are available for comparison)

  • Is it trying to keep debt off the books? Is there any debt for equity swaps? (look for convertibles, increase in no of shares etc)

Yes (through associates)

  • Is the company using a subsidiary for borrowing which it is not consolidating? (look at the subsidiaryâs B/S and loans from subsidiaries in its own B/S, find out if it has control or significant influence over the subsidiary)

Yes (Rs. 200 lacs loan from associate companies in 2011, which it doesnât consolidate)

  • Is the company carrying impaired assets? (hint: asset utilization)

Not answerable due to lack of information

  • Does the company distort the actual picture while accounting for its subsidiaries? (find out if the method used is in line with the degree of control it exercises)

Maybe (because it has taken a loan from associates which implies significant influence if not control)

  • Has the off balance sheet liabilities as a percentage of total liabilities increased significantly? (schedules of lease)

No data avaliable

  • Has the company been using short term funds for long term purpose or vice versa? (look for change in working capital accounts, CFF and change in LTD coupled with increase in fixed assets) (look at the auditorâs report first)


  • Is the company writing off assets immediately when they become impaired? (look for impairments and the explanation in schedules)

No (the company had set up shrimp shell manufacturing plant in 2000 it has remained idle since 2007 and the company has been carrying it, it has written off the plant recently)

  • Is the company depreciating fixed assets too slowly? (compare with peers and see if it is logical)

Difficult to answer due to lack of information on age and residual value. (However considering zero cost basis most of them seem more or less logical except for office equipments)

  • After merger or while consolidation subsidiaries has the company recorded assets at fair value? (look at asset values before merger (on targets schedules) and after merger)

No (pooling of interest method has been followed, recorded at book value)

  • Are there any related party transactions? (schedules)

Yes (Rs. 644.48 lacs of purchase and a royalty payment of Rs. 145.09 lacs in FY12)

15). Has there been unjustified change in accounting policies?

  • Has the inventory valuation method changed? (schedules for inventory)

Yes (before raw material and packaging material were valued at lower of weighted average cost or net realizable value and now they are valued at weighted average cost)

  • Have the depreciation or amortization periods decreased? (depreciation & amortization schedule)

No information avaliable

  • Has the estimate for residual value changed? (deprecation schedule)

No (nothing as such is mentioned)

  • Has the depreciation method changed? (deprecation schedule)

_No _


Have discussed some of the points discussed here in the thread of Avanti Feeds.


A great thread. As you mentioned, we can have checklist once the list gets refined by contribution from the group members.

One aspect I can think of is

1). How does the company account for forex losses?



this is a good one. for this we’ll have to dig deeper to see if it uses all current rate method or temporal method to account for forex gains and losses, if it represents the true economic picture and if the company has changed the method to take undue advantage of them.



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