Knowing how to review and evaluate financial statements is a critical skill for a business leader, not just to verify the accuracy of records, but also the truthfulness of the statements.

Increasingly, many businesses become subject of corporate scandals, misappropriating funds, failing to expense lost investments, creating artificial profits to prop up company’s share price; it’s become even more pertinent for owners, executives, entrepreneurs to be able to interpret financial statements, as failure to do so carries significant consequences including jail time.

1. Compare source documents with general ledger – Financial statements can be manipulated to paint a much rosier picture of the business financials, often by eliminating or exclusion of certain transactions. In that case, a business maybe losing money without management noticing discrepancies. Therefore, it is important to review and go through the general ledger and subsidiary books of entry to detect any errors. Comparing source documents with the general ledger can make those errors much more visible.

2. Ensure previous financial statements match with current corresponding periods:  Look out for and investigate inconsistencies between the six months trading periods, for example, if they are completely different, chances are, the books are being cooked.

3. Evaluate cash account transactions: Randomly pick one cash account and request source documents for that account. You should be able to find the supporting source document for every cash transaction, such as bank slips and checks proving that a transaction took place. By examining these against the business bank account, you can verify the authenticity of transactions

4. Know your day-to-day numbers: Evaluate average income of the business and look for discrepancies to account for increases or decreases in different accounts. The numbers must match, for example, if the COGS shows a higher value than normal, revenue should also reflect similar increase to account for the change, otherwise, business could be losing or overspending money somewhere.

5. Analyze financial ratios: examine your debt-to-equity ratio, used to determine the stability of the business, it should be somehow similar to ratios of previous trading periods. A significant difference might indicate unscrupulous accounting methods are being used to skim off business profits. Financial ratios do not change much.

6. Get a professional second opinion: In addition to doing the legwork yourself, Hire an internal auditor to look over your financial statements once prepared to ensure accuracy and compliance with accounting rules and regulations. Internal auditors are sure to unearth and fix errors made.