Cash Flow Analysis: A Technique for Detecting Cash Generation

This article appeared in the GAO Review, Vol. 15, Issue 2, Spring 1980. Cash-flow analysis is an effective way to disclose cash generation schemes, which are often a first step in engaging in corrupt acts. Cash flow analysis is the systematic examination of those transactions which result in debits and credits to cash accounts. Such cash generation schemes, when bribery, extortion, or kickbacks are suspected, must be disguised as legitimate transactions. The normal approach to audit work is incompatible with cash flow analysis. Audit work requires some reliance on management representations, statistical and judgmental sampling. Cash-flow analysis rejects all management representations. It is applied when the management is suspect. In cash-flow analysis, all bank statements, deposit slips, and canceled checks for a predetermined period are carefully examined to identify unusual transactions that could be a part of a cash generation scheme. It becomes quite easy to distinguish between normal and unusual transactions. Once unusual transactions have been identified, they should be traced from start to finish through the organization records. The last phase of analysis consists of in-depth interviews with the parties to the unusual transactions. Done properly cash flow analysis lays bare the scheme and provides a springboard to an effective prosecution.