How to Detect Earnings Management

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Companies sometimes manipulate the financial statements, whether through earnings management or outright fraud. Here are some ways to determine whether a company has manipulated its financial statements:
(1) ratio analysis
(2) trend analysis
(3) industry comparison
(4) review critical estimates or assumptions
(5) look for changes in accounting methods or estimates
(6) look for changes in credit policy
(7) look for large deviations between net income and operating cash flow
(8) look for an inventory build-up
(9) check for abnormally high shipments/sales right before the end of the period
(10) compare sales figures to sales/shipment data from a third party
(11) examine one-time charges
(12) look for reversals of charges from prior periods
(13) note whether the company is "lending" money to customers to buy its product
(14) identify whether routine costs are being capitalized
(15) identify off-balance sheet arrangements
(16) identify related-party transactions
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