Study financial statements

It is that time of the year when listed companies and financial institutions publish their financial statements of the previous financial year as per the respective regulations.

Basically, they are informing the public about their financial performance as regards revenue against expenditure and financial position in terms of assets vis-à-vis liabilities as verified by an independent auditor.

Based on recently published audited accounts, the media has generously portrayed some companies as being on an upward trajectory in terms of financial soundness. It is worth noting, however, that the scope and disclaimers as usually stated in the auditor’s report implies that even audited financial statements are susceptible to falsification, or “cooking”, by the directors for selfish gain. 

Among the reasons why a CEO could falsely books of accounts is demand for bonuses and salary increment, extension of contract or confirmation to acting position, hoodwinking financiers and suppliers or to intimidate competitors to give in. Stakeholders are likely to make wrong financial decisions at a glance of the accounts without scrutiny of the reported figures and the underlying circumstances. 

Cash flow statement

Companies prepare financial statements on an accrual basis, whereby sales are recorded even where no cash is received while expenses are posted before cash payment is made. Such a system presents opportunities to record huge figures as sales, expenditure or assets and liabilities based on assumptions. For instance, charging interest, penalties or estimated bills can inflate incomes of the reporting entity. 

It is prudent to carefully analyse the cash flow statement to determine the actual amount generated from operations, investment and financing activities compared to previous years. Worthy of attention is the balance sheet in terms of assets and liabilities.

Ask, how fast can the presented assets be converted into cash or are the assets stale or disputed with a low chance of recovery? Similarly, a review of the assets against liabilities will inform whether the company can meet its obligations as and when they fall due or it’s a camouflaged bankrupt.

Mr Mwinamo is financial auditor. [email protected]