Financial Reporting Problems and Warning Signs

The table below summarizes some (i.e. not comprehensive) common financial reporting problems and the warning signs associated with those problems.

FINANCIAL STATEMENT ITEM	REPORTING PROBLEM	WARNING SIGN	ANALYTICAL TOOL
Revenue	Overstated revenue.	Large increases in accounts receivable.	Look for increases in days sales outstanding (DSO) as this may indicate questionable credit sales by the company.
Revenue	Misclassification of non-operating or non-recurring revenue as operating revenue.	The company changes items included in calculation of earnings.
Expenses	Understating expenses.	Changing depreciation method; increasing useful life or salvage values.	Analyze depreciation ratios; review footnotes to see if changes have been made to company's methodology.
Expenses	Improper capitalization of items that should be expensed (done to defer expenses).	Peculiar growth in non-current assets.	Compare growth of sales to growth of non-current assets. If sales growth is low, but non-current asset growth is abnormally high, future performance may be poor.
Expenses	Classifying operating expenses as non-recurring or non-operating.	Growth in operating margin accompanied by a growth in non-recurring or non-operating items.