Cash Flow Pattern Analysis of Fraud and Non-Fraud Firms: A Comparison and Contrast

Abstract

In the aftermath of the major financial scandals that came to light in the late 1990’s and early 2000’s, many researchers have begun looking into fraud detection and prediction. My research seeks to determine whether or not a company’s cash flow pattern is an indicator of fraud. A cash flow pattern consists of either a positive or negative flow of cash in the three categories relating to a company’s cash activities: operational, financial and investment. They are located on the financial report known as the Statement of Cash Flows. To conduct this research, I randomly selected 30 companies from a mixture of over 250 companies. These companies are known to have released fraudulent financial statements in the past few decades according to releases by the Securities and Exchange Commission. I matched these 30 fraud companies with similarly sized companies in the same industry based on assets. From here, I will review the distribution of cash flow patterns based on financial data from one year prior to the fraudulent activity. After running some statistical tests on the data, I will analyze the findings and determine the outcome of the research.