Selah- It is hard to tell as even auditors do not always pick all the errors given the inherent limitation of the relationship between the auditor and management. Manipulation of records is fraud like any other which is followed by a systematic process of cover up. However,if you have time and ability,there are analytical techniques you could apply to detect manipulation of accounts but these require analysis over a number of years and they do not guarantee success. The techniques include comparing sustainable cash flows to operating profits. Whereas management can manipulate profits,it is hard to manipulate the cash flows as the cash flow figure must agree to cash at bank (or at least reconciled). Over time,if the cash flows lag behind the operating profits,it could be a sign of fictitious sales that are not being converted into cash. There are other ways management could boost profits e.g. valuation methods and use of estimates in the accounts. Again you could look at the unrealised gains/losses from these valuation methods and you can adjust for them if they are not based on external market data- look at consistency of use of these methods etc. The hardest bit of it all is the off balance sheet items and management can choose to omit there completely and therefore you might not pick them in your analysis. The biggest financial reporting fraud revolve around off-balance sheet items – from Enron,Worldcom etc,companies are able to hide losses through these items. Although there is push to have most of these items on balance sheet,it is possible for management to omit them and for analysts,auditors,financial journalist to fail to pick them up.

@mukiha - For some reason paragraphs have been a problem for some users - myself included. No idea why SK hasn't responded to this problem

Greedy when others are fearful,Very fearful when others are greedy - to paraphrase WB

Smells like a rat.
The fact is that KRA will be on their neck for the 'profits' so reported

Happy are those who dream dreams and are ready to pay the price to make their dreams come true

Thanks mturi!!! You should be a teacher, you got simplicity,precision,clarity and accuracy in your explanation that is easy to understand and truly educational. Bravo keep it up.


Weusi wa nywele za mshtakiwa zaonyesha ujinga alio nao

Well I doubt the big four are... from what I know of the operations of all four,the audit report you see is a result of huge collaborative effort and the Partners would be hard pressed to drop without justification issues that emanate from several documents on file prepared by different people.. Further,all the big four firms have in place processes where their work is reviewed annually by auditors from their sister firms in other countries whose motivation is just like any other auditors - to catch violators,uncover issues and produce huge reports...