Balance-Sheet/Cash-Flow
Browse Word (.docx) playbooks in this category.
Accounts Receivable Not Collectible
This module addresses the risk that recorded receivables do not represent genuine, enforceable and collectible obligations. Beyond the bad-debt allowance in Module 20, this module examines whether receivables exist as valid claims: disputed balances, fictitious-transaction receivables, bankrupt customers carried at full value and re-aged receivables disguising delinquency. The module examines revenue-fraud downstream patterns where uncollectible receivables resulted from fictitious or conditional sales. Key detection methods include positive confirmation, aging analysis, subsequent-collection testing, dispute investigation, re-aging detection and write-off timeliness review. The dialogue identifies $4.2 million in three categories: $600,000 disputed by Westfield (credit recommended but never processed), $1.8 million re-aged through new invoices without genuine negotiations and $1.8 million from two bankrupt customers flagged by collections but never written off by the controller.
Cash Misstated or Restricted
This module addresses cash-balance misstatements including reconciliation manipulation, undisclosed restrictions, kiting between bank accounts and outright fabrication of bank balances. The module examines the Wirecard AG collapse where approximately EUR 1.9 billion in reported cash likely never existed, held in fabricated trustee accounts where bank confirmations were intercepted and forged. Key warning signs include intercompany transfers in the final days, cash in jurisdictions with repatriation restrictions, single-person reconciliation control and confirmations routed through management. Audit procedures include direct bank confirmation, reconciling- item verification, kiting analysis and restricted-cash evaluation. The dialogue identifies $4.5 million in intercompany kiting (double-counted through a U.S.-U.K. transfer timing difference) and $12 million in undisclosed restricted cash ($7 million debt-service reserve, $3 million China repatriation, $2 million acquisition escrow) out of $52 million reported.
Cash-Flow Classification Manipulation
This module addresses the misclassification of cash flows between operating, investing and financing categories under ASC 230 to inflate operating cash flow. Common techniques include capitalizing operating costs (shifting outflows to investing), classifying vendor settlements as investing rather than operating and using receivable- factoring or supplier-finance arrangements to accelerate operating cash flow. The module examines SEC enforcement patterns including a telecommunications company reclassifying $500 million in lease payments. Key detection methods include operating-cash-flow quality analysis, capitalization-to-cash-flow linkage, factoring- arrangement review and balance-sheet reconciliation. The dialogue identifies three misclassifications inflating operating cash flow by $7.2 million: $3.1 million in vendor settlements classified as investing, $2.8 million in supplier-finance timing benefit classified as operating and $1.3 million from improperly capitalized IT maintenance.
Supplier-Finance Arrangements Disguised as Payables
This module addresses supply-chain financing programs where a bank pays the company's suppliers early and the company repays the bank on extended terms. When the extended terms have financing characteristics, the obligation should be classified as debt rather than trade payables. ASU 2022-04 now requires disclosure of program terms, outstanding balance, balance-sheet presentation and rollforward. The module examines the Carillion collapse where supplier-finance programs masked the company's true cash-flow position and leverage. Key warning signs include DPO increases without supplier-term changes, operating-cash-flow improvement coinciding with program implementation and leverage ratios near covenant thresholds. The dialogue discovers an undisclosed nine-month-old program extending payables from 30 to 90 days, covering $18 million with no classification analysis, no ASU 2022-04 disclosure and $12 million in operating-cash-flow benefit requiring reclassification to financing.
Hidden Debt and Off-Balance-Sheet Obligations
This module addresses financial obligations that are not recorded on the balance sheet or are presented in ways that obscure their nature as borrowings. Hidden debt mechanisms include off-balance-sheet SPEs, sale-leaseback arrangements with repurchase commitments, take-or-pay contracts, guaranteed debt of unconsolidated affiliates and factoring with recourse. The module examines the Enron Corporation collapse where thousands of SPEs concealed billions in debt while the company retained all economic risks. Key warning signs include significant unconsolidated commitments, guaranteed third-party debt, leverage ratios below peers and vague MD&A off- balance-sheet disclosures. The dialogue identifies two obligations: an undisclosed $11 million guarantee of a joint venture's bank debt requiring ASC 460 disclosure, and a Brazil subsidiary sale-leaseback with below-fair-value repurchase option requiring reclassification as $14.5 million financing with $2.4 million gain elimination.
Receivable Sales with Retained Risk
This module addresses receivable-sale transactions that are accounted for as sales when the company retains significant credit risk, making the economic substance a secured borrowing. Under ASC 860, sale treatment requires that the transferred assets are isolated, the transferee can pledge or exchange them and the transferor does not maintain effective control. Retained recourse, subordinated interests and implicit guarantees through voluntary replacement of defaulted receivables all indicate the company has not surrendered control. The module examines SEC enforcement involving receivable securitizations with first-loss retention and implicit-guarantee patterns. Key detection methods include sale-accounting-condition testing, implicit-guarantee assessment and retained-interest valuation. The dialogue reviews a factoring program with a 60-day recourse provision and 5% subordinated reserve, requiring reclassification of $24 million from sale to secured borrowing with $380,000 gain reversal.