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Tools to Apply to Financial Statements to Identify Errors, Omissions and Fraud in Business Valuations

Author

Listed:
  • Tom Clevenger

    (Washburn University)

  • Gary Baker

    (Washburn University)

Abstract

Often economists are asked to value business. Many times the information provided is minimal and of questionable value. Data may be provided by parties wishing to bias the valuation. The financial statements typically provided are balance sheets and income statements. These sources can be fraught with errors, omissions and even fraud. The cash flow statements derived from these statements can be misleading and any analysis from these spurious statements is sure to be questioned. A set of tools exists that can use to establish the reliability of these financial statements. Reliability is usually taken for granted in basic accounting and finance and reality is often not as assumed. The tool kit uses basic accounting and mathematical logic. This logic, teamed with basic accounting definitions and conventions, allows the economist some comfort that the statements provided for use in the business valuation are free of obvious misinformation. These tools can also help uncover some less detectable fraud. For the analysis to proceed there must be two balance sheets and the intervening income statement. By applying the accounting conventions and definitions, real, probable and possible solutions are developed and explained. After examining the relationship between the financial statements one is better able to value the business and be confident of the analysis.

Suggested Citation

  • Tom Clevenger & Gary Baker, 2007. "Tools to Apply to Financial Statements to Identify Errors, Omissions and Fraud in Business Valuations," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(2), pages 75-86, Fall.
    • Handle: RePEc:pep:journl:v:12:y:2007:i:2:p:75-86
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    References listed on IDEAS

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    1. Robert J. Aalberts & Terrence M. Clauretie & Joseph P. Matoney, 2000. "Small Business Valuation: Goodwill and Covenants-Not-To-Compete in Community Property Divorce Actions," Journal of Forensic Economics, National Association of Forensic Economics, vol. 13(3), pages 217-231, September.
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    Cited by:

    1. MIRON Vasile Cristian Ioachim & BURJA Vasile & FOCSAN Eleonora Ionela, 2015. "Content Of Financial Statements And Their Informative Valences For Stakeholders," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 0, pages 255-261, July.
    2. David J. Scheaf & Matthew S. Wood, 2022. "Entrepreneurial Fraud: A Multidisciplinary Review and Synthesized Framework," Entrepreneurship Theory and Practice, , vol. 46(3), pages 607-642, May.

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    More about this item

    Keywords

    Valuation; Financial Statements; Fraud;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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